
Class jM^a:!!! 

Book A J 8 

Copyright N*:" 



COFBRIGHT DEPOSm 



THE CITIZEN'S LIBRARY 

OF 

ECONOMICS, POLITICS, AND 
SOCIOLOGY 

EDITED BY 
RICHARD T. ELY, Ph.D., LL.D. 

DIRECTOR OF THE SCHOOL OF ECONOMICS, 

POLITICAL SCIENCE, AND HISTORY, 

UNIVERSITY OF WISCONSIN 



ECONOMIC CRISES 



-y^y^ 



THE CITIZEN'S LIBRARY 



ECONOMIC CRISES 



BY 



EDWARD D. JONES, Ph.D. 

ASSISTANT PROFESSOR OF ECONOMICS AND COMMERCIAL 
GEOGRAPHY, UNIVERSITY OF WISCONSIN 



Neixj gorit 
THE MACMILLAN COMPANY 

LONDON : MACMILLAN AND CO., LTD. 
1900 

All rights reserved 



12856 


L-Jbrai'V ■: 

JUN^SO I9iu 



i SECOND COPY. 
Delivered to 

ORDER DlVSSiON, 

JUL 12 1900 



Copyright, igoo, 

bf the macmillan company. 



Norb3fDott i^resB 

J. S. Gushing & Co. — Berwick & Smith 
Norwood Mass. U.S.A. 



CONTENTS 



CHAPTER 

I. Introduction 


PAGE 
I 


II. 


The Industrial Equilibrium 


21 


III. 


The Organization of Industry . 


41 


IV. 


Crises and the Problem of Capital 


58 


V. 


Crises and the Wage System 


81 


VI. 


Crises and Legislation 


103 


VII. 


The Periodicity of Crises . 


131 


VIII. 


Credit and Speculation 


153 


IX. 


The Psychology of Crises . 


180 


X. 


Conclusion .' 


219 


Bibliography 


225 


Index 




247 



ECONOMIC CRISES 

CHAPTER I 

INTRODUCTION 

The growth and differentiation of industrial 
institutions which have taken place within the 
present century have brought many new and per- 
plexing problems to the man of affairs and the 
student of economics. None of these problems 
takes a firmer hold upon the fundamentals of 
economic society than does that of crises, and 
few of them receive more attention or create 
more controversy. 

The crisis is practically of nineteenth-century 
origin, and it is an acute malady to which business 
appears to be increasingly subject. These crises 
are periodically recurring convulsions which para- 
lyze the course of trade, give rise to violent fluctu- 
ations of values, and leave behind them crippled 
industries, bankrupt or suspicious capitaHsts, and 
impoverished laborers as the result of their visits. 

It is often desirable to begin a treatise with a 
definition. Descriptions and definitions, however, 



ECONOMIC CRISES 

shade off almost imperceptibly into one another, 
and what may be called a descriptive definition is 
sometimes best suited to the purpose. Two such 
descriptions of an industrial cycle containing a 
crisis are here offered. The first, taken from the 
Tracts of Lord Overstone, is as follows : ** State 
of quiescence, improvement, growing confidence, 
prosperity, excitement, overtrading, convulsions, 
pressure, stagnation, distress, ending again in qui- 
escence." ^ A somewhat more extended descrip- 
tion from the pen of Frederick Engels is as follows : 
" The whole industrial and commercial world, pro- 
duction and exchange, among all civilized peoples 
and their more or less barbaric hangers-on, are 
thrown out of joint about once every ten years. 

1 The symptoms of a crisis are thus catalogued by Max Wirth : 
" I. Abnormal activity in floating enterprises, and boldness in spec- 
ulation. 2. Unusual activity in stock-jobbing: viz. the desire to 
found stock corporations in order to use all possible means to force 
the stocks rapidly to a high figure, and then sell out at a profit, leav- 
ing the corporation to those in vi^hose hands the stock, like an un- 
lucky card, is found at last. A rule in such cases is that a good 
business is operated by one's self or a few companions, but a bad 
one is formed into a stock company. 3. Unusual excitement and 
gullibility of the public caused by the report of large profits. 
4. Rapid increase of luxury. 5. Sharp rise of the price of necessa- 
ries, articles of luxury, raw^ materials, and provisions. 6. Rise in 
the price of real estate. 7. Strong demand for labor, and rise in 
wages. 8. Unusual expansion of credit and credit instrumentalities 
in consequence of which a rapid and unusual increase in discount. 
9. Large demand for cash, and, in consequence of this demand, a 
decline in stocks." — " Handbuch des Bankwesens," 3 Aufl., p. 62. 
The same is also contained in the " Geschichte der Handelskrisen," 
by Max Wirth. 

2 



INTRODUCTION 

Commerce is at a standstill, the markets are glutted, 
products accumulate, as multitudinous as they are 
unsalable, hard cash disappears, credit vanishes, 
factories are closed, the mass of the workmen are 
in want of the means of subsistence, because they 
have produced too much of the means of subsist- 
ence, bankruptcy follows upon bankruptcy, execu- 
tion upon execution. The stagnation lasts for 
years ; productive forces and products are wasted 
and destroyed wholesale, until the accumulated 
mass of commodities finally filters off, more or less 
depreciated in value, until production and exchange 
gradually begin to move again. Little by little the 
pace quickens. It becomes a trot. The industrial 
trot breaks into a canter, the canter in turn grows 
into the headlong gallop of a perfect steeple-chase 
of industry, commercial credit, and speculation, 
which finally, after breakneck leaps, ends where it 
began — in the ditch of a crisis. And so over and 
over again." 2 

If we confine our thought to the culminating 
period of a crisis, we may define it more concisely 
than is done above, in the following terms : A crisis 
is the sudden application of a critical conservatism 

2 " Socialism : Utopian and Scientific " (trans, by Edward Ave- 
ling), London, 1892, pp. 64, 65. The steps are given by another 
author thus : " A round of variations expressed as follows, is pretty 
sure to run its course at least once in the life of each generation : 
•torpor, prudence, health, plethora, blood-letting'; or thus: 'stag- 
nation, economy, productive industry, accumulation, enterprise, ex- 
pansion, collapse.' " — T. F. Plunkett, " Money Panics and Specie 
Payments," Pittstield, Mass., 1873, p. 9. 

3 



ECONOMIC CRISES 

to business transactions, leading to such a demand 
for liquidation as to cause a widespread inability 
among business men to meet their obligations.^ 

Herkner follows Roscher in defining crises as 
consisting of a disturbance in the equilibrium 
between production and effective demand.* 

In the work of definition the most important 
point is to establish the proper distinction be- 
tween crises and industrial depressions. Either 
of these two classes of phenomena may appear 

8 Wagner says : " Crises imply . . . the overwhelming and 
simultaneous occurrence of inability on the part of independent 
entrepreneurs to pay their debts." — " Krisen," in Rentzsch, " Hand- 
worterbuch," p. 26. Clement Juglar thus defines crisis : " The com- 
mercial crisis, as in disease, is a critical period. The all-important 
question asked by those caught in embarrassment is whether they 
will hold out or succumb. The crisis is the touchstone which 
reveals the soHdity of commercial houses." — Say's " Dictionnaire," 
Sec. I. Mr. Horace White gives the following : " Commercial crises 
are disturbances of the course of trade at given times, arising from 
the necessity of readjusting its conditions to the common standard 
and measure of value." — Article "Commercial Crises," Lalor's 
" Cyclopaedia," Vol. I, p. 523. 

* To this Schaffle also agrees. Herkner, in Conrad's " Hand- 
worterbuch," Bd. IV, Sec. i, p. 891. Schaffle, " Handelspolitik," 
in Bluntschli's "Deutsches Staatsworterbuch," Bd. IV, p. 638. 
Schaffle criticises the definitions offered by Mill, Juglar, and Max 
Wirth, and also the definition of Coquehn, in the "Dictionnaire 
de I'Economie Politique," that crises are the sudden disappear- 
ances of credit. This calls to mind a remark made by John 
Mills in "The Bank Charter Act and the Late Panic," p. 6, 
where, in speaking of the crisis of 1866, he says: "A volumi- 
nous magazine writer on this subject considers the main evil to 
have been a want of currency, which is about as explicit as the 
jocular diagnosis that a man died of * want of breath.' " 

4 



INTRODUCTION 

independently of the other ; in fact, the presence of 
one is more or less a guarantee of immunity from 
the other. By some writers the crisis proper is 
called an ''active crisis," while an industrial de- 
pression is called a ''passive crisis."^ The patho- 
logic terminology which is frequently employed in 
the discussion of crises ^ enables us to express very 
well the distinction between crises and depressions. 
The first are acute, the second chronic maladies of 
industry. The causes of the first lead rapidly to a 
climax of unnatural and unstable conditions which 
in the panic find their rupture and give place to 
extreme stagnation. The causes of depression 
appear to be more enduring. They weigh down 
business by handicapping disabilities which exert 
a steady pressure, producing dejection and prostra- 
tion. A crisis results when business is carried to 
a high point from which it is precipitated. A de- 
pression marks the struggle of industry under a 
weight of adverse conditions. 

According as crises have more or less conspicu- 
ously involved disturbances of the medium of ex- 
change, of financial institutions, or of productive 
or commercial industry, they have been denomi- 
nated monetary, financial, commercial, or industrial 
crises. These varying designations are useful to 
indicate the causes or characteristics of individual 
crises. A more general term and one which 

5 De Viti de Marco, cited by Lexis in Schonberg's " Handbuch," 
2 Aufl., Vol. II, Ch. XXI, Sec. 51. 

6 Neuwirth, Roscher, and Schaffle, for example, use this. 

5 



ECONOMIC CRISES 

involves commitment to no view or school is 
economic crisisJ 

While the crash or panic is the particular feature 
which characterizes the modern crisis, no consid- 
eration of the subject, which is limited to this 
culminating period of the disturbance, can be com- 
plete. The circumstances leading up to the climax 
can only be distinguished by the study of the evo- 
lution of a crisis.^ 

''' Wagner uses the phrase " credit crises " because he especially 
emphasizes the abuse of credit as a cause of crises. "Overstock- 
ing of the market is usually an accompaniment of crises. The 
name overproduction crisis usually suffices therefore, but it does 
not express so exactly the nature of the evil as the name credit 
crisis. The expression money crisis is indefinite, since the word 
money has many meanings; capital crisis is not accurate enough; 
commercial crisis is one-sided, for crises are not affairs concerning 
commercial circles alone." — Rentzsch, " Handworterbuch," p. 526. 

The following division of crises is given by Max Wirth : " In 
the first place, there are two sorts of crises to distinguish : -— 
I. Crises of the circulating medium, and 

II. Crises of capital. 

The first are divided into such as follow distressing experiences 
or defective arrangements of the credit and money machinery of 
industry: («) a congestion of the circulating medium; {b) those 
which follow an immoderate issue of irredeemable paper currency, 
which causes a sudden rise of prices and unstable fluctuations. 

Those capital crises which fall under II may be subdivided 
into : (a) acute diseases of production, of stock market specu- 
lation especially accompanied by the founding of new enterprises, 
and of real estate values; (3) commercial crises proper and over- 
stocking of the product market." 

^ It is the business of the student to examine these years of 
business history, and construct in theory a complex of forces 
which will account for the phenomena. Oechelhauser says : " In 
our opinion, high and low prices do not stand opposed as good 

6 



INTRODUCTION 

The concentration of distress upon one portion 
of the industrial cycle which the term " crisis " 
implies is the result of modern economic practices. 
The division of function which was first planned 
between man and man has been extended to apply- 
between regions and countries. The organic rela- 
tions which have resulted have produced a de- 
pendency of part on part. The life history of any 
industry is of import to all. Particularly, however, 
have the institutions connected with finance and 
credit worked an economy of effort based upon the 
existence of normal conditions. The crisis reaches 
each industry through the interdependence of in- 
dustries, but chiefly through the relation of all 
industries to monetary and credit institutions. 

The importance of crises as a subject of study 
is commensurate with the loss which they inflict. 
The industrial life of the nineteenth century can- 
not be completely presented without considering 
them. As Diihring has well pointed out health 
and disease are but two complementary phases 
under which the processes of life manifest them- 
selves. To understand the social organism com- 
pletely we must study it in disease as well as in 
health.9 

and bad, or prosperous times and calamitous times, but they 
together form two phases of the same critical evolution. The 
last crisis took its start in the unusual advance of prices over 
values, not with the revolution of prices." — « Die Wirthschaft- 
liche Krises," p. 24. 

^ E. Diihring, " Cursus der National- und Socialokonomie," 
Part V, Ch. I, p. 225. Cf. Cossa, "An Introduction to the Study 

7 



ECONOMIC CRISES 

The striking and unusual character of the phe- 
nomena composing a crisis calls attention to them, 
but sets them in a light which is, on the whole, 
not favorable to their proper scientific observation. 
It is hard to recognize in the crisis the result of 
a combination of familiar forces. The interest 
which invests crises attracts many to their study 
who come inadequately equipped by previous 
training in the observation and interpretation of 
economic phenomena. Again, in the study of so 
pronounced a subject, arraying interests so sharply 
against one another, it is natural that opinions 
should prevail which are pronounced rather than 
judicious. A voluminous partisan literature exists 
on the subject of crises which impedes scientific 
research. The study of crises is difficult, since the 
crisis is a period of rapid transition. Conditions 
are not permanent enough to permit of elaborate 
examination and classification. The forces which 
are in control are an entirely different compound 
of human motives than that which usually prevails. 

The gradual appearance of crises within a com- 
paratively recent period and as an accompaniment 
of the present industrial system, gives to them at 
once a definite significance. They have come to 
us in company with industrial freedom and indi- 
vidualism, with the factory system, the extension 
of foreign commerce, the use of credit, and the 
other features which mark the economic life of 

of Political Economy," London, 1893, Theoretics, Ch, IV, Sec. 2, 
pp. 47, 48. 

8 



INTRODUCTION 

this century. The order in which the leading 
industrial nations began to experience crises is a 
significant fact, as is to-day the varying degrees of 
intensity with which these storms expend them- 
selves in different countries. It helps to direct 
inquiry to know that crises are more severe and 
frequent in the United States than in any other 
country. They are felt in progressively diminish- 
ing force in England, Germany, France, Holland, 
and Switzerland. The comparative study of the 
history of crises suggests the wisdom, of observing 
the extent to which various nations have developed 
foreign trade and adopted credit and banks. The 
study of race psychology is not foreign to the sub- 
ject, nor the observation of national honesty, edu- 
cation, natural conservatism, and the speed and 
energy of life.^^ The comparative method alone 
renders it possible duly to subordinate the politi- 
cal situation, the peculiar system of currency pre- 
vailing, the banking system adopted by a nation, 
or the bankruptcy legislation in force. 

Especially significant for comparative study is 

1^ After stating that crises fall where the credit system is well 
developed, Mr. Horace White says : " It is an observed fact that 
nations of Teutonic origin (including the English, American, 
German, Dutch, and Scandinavian) are most frequently and se- 
verely affected with commercial crises." — Lalor's "Cyclopaedia," 
Vol. I, p. 524. 

De Tocqueville considered that the temperament of democratic 
nations was particularly favorable to crises, since in them economic 
ambitions are supreme. — " Democracy in America," Boston, 1873, 
Vol. II, Bk. II, Ch. XIX, prf»92. 

9 



ECONOMIC CRISES 

the international or world crisis. The widespread 
disturbance which occurred between the years 1836 
and 1839 in most nations, and the crises of the 
years 1857, 1873, and 1882, deserve to be desig- 
nated world-crises.^^ The crisis of 1825, which 
affected England and America together with some 
other countries, and which arose through the dis- 
turbance of the cotton trade, may perhaps be 
ranked as the first international crisis. In 1847 
the condition of England very seriously affected 
the money markets of Paris, New York, and 
Amsterdam. The most widespread and endur- 
ing international crisis was probably that of 1873. 
This susceptibility of the whole crisis area of the 
world to be drawn from time to time into one con- 

11 The following table is presented by Juglar in Say's " Diction- 
naire," to show the solidity of France, England, and the United 
States in the matter of crises. Crises of more or less severity 
have occurred at the dates indicated : — 



France 






England 




United States 


1804 .... 1803 .... 


1810 . 






1810 . 








1813-I4 






1815 . 






1814 


1818 . 






1818 . 






1818 


1825 






1825 . 






1826 


1830 . 






1830 . 








1836-39 






1836-39 






1837-39 


1847 . 






1847 . 






1848 


1857 . 






1857 . 






1857 


1864 . 






. 1864-66 
1873 . 






War 
1873 


1882 . 






1882 . 






1882 



Compare this list with the one given in Ch. VII. 

10 



INTRODUCTION 

vulsion, shows a high degree of economic inter- 
dependence. 

The question whether crises are increasing in 
severity has been a much mooted one. The mat- 
ter presents a different appearance according to 
whether a long or short industrial period is con- 
sidered. Taking the entire history of crises into 
account, an increase in the severity of crises seems 
certain. During the last half century, however, 
crises appear to be losing something of their in- 
tensity, but to be approaching the character of 
industrial depressions as the period of recovery 
after a crisis is lengthened.^^ 

The place which the subject of crises should 
occupy, in a systematic treatise upon political 
economy, is not definitely fixed. For German 
economists, who divide their works into theoreti- 
cal and practical economics, the matter presents 
little difficulty, although the discussion of crises 
is by no means always placed in the latter divi- 
sion.^^ For those who hold rigidly to the English 

^2 In the " First Annual Report of the Commissioner of Labor," 
upon " Industrial Depressions," occurs the following : " As already 
stated, the features of regularity and contemporaneousness of crises 
and depressions have been apparent since the commencement of 
this century. Crises and panics, with more or less of industrial 
depression accompanying them, have occurred in various coun- 
tries, but there were not such strong connecting influences and 
facts and associated conditions as have been observed during the 
past fifty years." — Ch. I, p. 15. 

13 « A review of the literature of crises discovers the fact that the 
position which this theory has occupied in economic science has 
been an extremely varied one. Without considering that the sub- 

II 



ECONOMIC CRISES 

division of the science into Production, Exchange, 
Distribution, and Consumption, the adjustment of 
the subject into the general scheme of arrange- 
ment is more difficult. The crisis involves so 
many economic functions that it cannot be ade- 
quately treated within the boundaries of any one 
of the departments of economic science. Impor- 
tant considerations arise when the subject is looked 
upon from each of the view-points, — Production, 
Exchange, Distribution, and Consumption. It 
lies athwart these lines of demarkation. From 
the standpoint of crises it is possible to judge 
every important economic tendency, and study 
every economic institution. If crises are disturb- 
ances of the equilibrium between production and 
consumption, they evidently concern both these 
functions as well as the methods of adjusting the 
two with which Exchange and Distribution have 
to do. In accordance with this view we find such 
writers as Professor R. T. Ely, presenting some 
special aspects of the subject of crises in each of the 
divisions of theoretical economics, while emphasiz- 
ing especially the connection between crises and the 

ject is taken up at times in the general, then in the special, part 
of economic science, and sometimes in both, we find its position 
in General Economics variable. Often it is treated under Pro- 
duction, as a disturbance of the same; again and most frequently 
it is taken up in Exchange; at times in Consumption, as is the 
practice with Roscher, who considers all crises to be disturbances 
of the balance between production and consumption. Rodbertus- 
Jagetzow considers crises under the caption Distribution." — Was- 
SERRAB, •* Preise und Krisen," p. 39. 

12 



INTRODUCTION 

process of consumption. Francis A. Walker, in 
his " Political Economy," set apart for the consid- 
eration of crises a portion of the last chapter under 
the subject of Exchange, entitling it ''The Reac- 
tion of Exchange upon Production." i* J. S. Mill 
lays some of the fundamental propositions neces- 
sary to his development of the subject in Book I, 
on Production, others in Book II, on Distribution, 
and he finally brings out his theory in Book IV, 
entitled, " Influence of the Progress of Society on 
Production and Distribution." 

Turning to the theories which have been con- 
structed to account for crises, we have first to 
notice some of the limitations of economic theory 
which concern us. As is to be expected in the 
case of so striking and intricate a subject, a truly 
enormous number of theories have been expounded 
to explain crises. The " First Annual Report of 
the Commissioner of Labor," which was devoted 
to the subject of industrial crises and depressions, 
enumerates the following assigned causes of crises : 
Railway speculation, under-, over-, misdirected, and 
unsteady consumption, contracted, inflated, depre- 
ciated, or fluctuating currency, machinery, various 
kinds of laws, debt, intemperance, monopoly, spec- 
ulation, tariff, and taxation. These are but a few 
of the particular arraignments, while bad sanitary 
conditions, free passes, education too exclusively 
intellectual, coolie, convict, female, child, and im- 

1* " Political Economy" (advanced course), Part III, Ch. VII. 
13 



ECONOMIC CRISES 

ported labor come in for a share of the blame. 
The enumeration rounds well up to the border 
of the ridiculous with the mention of such causes 
as absence of caste, and instinctive and wide- 
spread indolence. Concerning the collapse of 
1878, Mr. Walter Stanley Jevons wrote, in his 
essays on Currency and Finance : " It is curious 
to notice the variety of the explanations offered 
by commercial writers concerning the course of 
the present state of trade. Foreign competition, 
beer drinking, over-production, trades-unionism, 
war, peace, want of gold, superabundance of sil- 
ver. Lord Beaconsfield, Sir Stafford Northcote, 
their extravagant expenditure, the Government 
policy, the Glasgow bank directors, Mr. Edison 
and the electric light, are a few of the happy and 
consistent suggestions continually made to explain 
the present disastrous collapse of industry and 
credit." To this list a malicious reader might add 
" sun-spots." 1^ 

The literature devoted to crises is full of discus- 
sions of the purely local and incidental features of 
individual crises. The external and apparent has 

1^ Many opinions concerning the origin of crises have been 
expressed by economic writers which have not been taken up 
to any extent by students of the subject, Laveleye emphasizes 
the derangement of the balance of trade leading to the exporta- 
tion of precious metals as the cause of contractions of credit liable 
to bring on crises. Bonamy Price attributes crises to a diminution 
of the means of buying. Nasse dwells upon the effect of changes 
due to progress. Leroy-Beaulieu brings forward the importance 
of commercial treaties and of commercial legislation in general. 

14 



INTRODUCTION 

always been seized upon. Without comparative 
study it is impossible to establish a perspective 
within the subject which permits the subordina- 
tion of local and incidental causes to those more 
fundamental. The literature which appears dur- 
ing and immediately after a crisis, and which con- 
tains only an analysis of that crisis, cannot be 
expected to contribute much to a well-balanced 
discussion of the subject. Writers who only ven- 
ture into the field when stirred by local happen- 
ings, are likely to be permeated by local prejudices 
and inflamed by prevailing social and economic 
controversies.^^ When it has been determined that 
any crisis is unusual in character and in its causes 
departs from the type, then we must look with 
distrust upon all literature known to have been 
particularly inspired by it. The crises of the 
latter part of the seventeenth century and the 
first part of this century seem, as a rule, to have 
been the result of peculiar and unusual combina- 
tions of events. The conditions under which they 
occurred are so different from those prevaiHng 
since, that it may be safely said that little of value 
can be found in discussions published prior to 1837. 

1^ " As is often the case, in the study of crises and in distin- 
guishing their successive periods, theory has gone ahead of 
practice. It need not excite surprise that that theory was for 
iwenty-five years considered one of the most obscure in eco- 
nomics. Each author, maintaining his own point of view, has 
indicated such causes of crises as best agree with the system 
of thought he has accepted or built up." — Clement Juglar in 
Say's " Dictionnaire." 

15 



ECONOMIC CRISES 

In the literature of crises the tendency has until 
recently been strong to consider the last link in a 
chain of causes as the only one of importance. 
The crash of a panic has been observed to the 
neglect of the pre-crisis period in which the secret 
of causes lies.^*^ Financial and credit institutions 
have received undue attention because through 
them unstable conditions are first brought to 
rupture. 

Not only are the varying phases of the history 
of commercial convulsions reflected in theories of 
crises, but so also are the prevailing social and 
economic ideas. As Friederich A. Lange has 
said, "We examine a science, and we find in its 
doctrines only the mirror of social conditions." ^^ 
It is human nature that good results or qualities 
should be referred most easily to causes or objects 
which already have a favorable character in our 
estimation. Bad actions are laid at the door of 
those whom we believe to be bad. Crises have 
been time out of number laid at the door of the 
opposite political party, the disliked financial sys- 

1'^ " In all economic questions, one can note the tendency of 
observers to trace great consequences back to some single cause 
which, by accident, is known or understood by them. This ten- 
dency has especially manifested itself in the judgments which have 
been formed regarding the causes of periods of speculation and 
commercial crises, and in general regarding phenomena connected 
with money and credit." — A. Wagner, "Die Geld- und Credit- 
theorie der Peel'schen Bankacte," p. 257. 

18 "History of Materialism" (2d ed.), Boston, 1879-81, Vol. 
Ill, p. 233. 

16 



INTRODUCTION 

tern, and the economic class with whose interest 
one's own is not coincident. This kind of work is 
on an intellectual level with the practices of those 
villagers of past centuries who evolved the idea of 
a witch, attributing the sickness and deaths of the 
community to the influence of old women who 
were primarily disliked for their ugly appearance 
and temper. 

The history of crises has often been made an 
arsenal from which were to be drafted arguments 
for political and economic polemics. The theory 
of crises has been a handle in many arguments, 
and has been subordinated to the purpose of first 
one popular discussion and then another. 

As between the French, German, and English 
literatures of the subject some comparisons may 
be made. In France, the literature of crises was 
for a long and important period a mere side-light 
in the discussion of the freedom of bank-note 
issue. French scientific economic literature, in 
common with the English, brings the subject of 
crises into connection with the dispute over the 
law of markets or over-production. English writers 
for some time only mentioned crises to connect 
them in one way or another with the expositions 
of the "Currency School" or to use them in the 
defence or attack of the Peel Bank Act of 1844. 

That the theory of crises should have been until 
the last three decades involved in abstract discus- 
sions of over-production, currency, and interna- 
tional trade is not, broadly speaking, accidental. 
c 17 



ECONOMIC CRISES 

Before the period mentioned the ideals and 
methods of the exact sciences prevailed and in- 
fluenced economics. Such subjects were naturally 
chosen as best fitted these methods, and economics 
was built with the idea of an exact science in mind. 
More recently the biological sciences have been 
built up. They now exert an influence as ideals, 
while the inductive method appropriate to them 
has extended its influence. 

Germany brings a double contribution, namely, 
that of the socialists and that of scientific econo- 
mists. These two are relatively distinct. The 
contribution of the socialists to the subject is very 
considerable. German scientific literature is not 
greatly influenced so far as the theory of crises is 
concerned by socialistic thought, and is free from 
prolonged entanglement with any other discussions 
such as arose in England or France. It is in Ger- 
many, therefore, that we find the most systematic 
and unprejudiced discussions of crises. 

Before proceeding to consider the various theo- 
ries of crises it may be well to say a word con- 
cerning diversities of view. The differences of 
position taken by writers is very frequently more 
apparent than real. Of a number of investigators 
who perceive that crises result from a divergence 
between supply and demand, some will speak of 
over-production and others of under-consumption. 
Of a number who examine the fluctuation of 
demand and single out as the cause of crises the 
failure of the effective demand of wage-earning 

i8 



INTRODUCTION 

classes, some will maintain that the institution of 
private property permits capitalists to defraud 
wage-earners and will, with Rodbertus, hold a 
socialistic theory. Others, like Robert Owen, will 
see most clearly the influence of machinery in 
these results, and will frame a mechanical and 
technical problem. Others still may, with Bren- 
tano, look upon the condition of the wage-earner 
as due primarily to his intelligence and providence 
or improvidence, and will thus constitute out of the 
matter a moral problem. 

Let us proceed to the statement, in as favorable 
a light as may be, of the chief theories explaining 
crises. The presentation in the following chapters 
will be dominated by the idea of making each new 
point of view a position from which certain impor- 
tant aspects of the subject may be best elucidated. 
The chapters which follow form, therefore, at once 
a systematic discussion of crises and a presentation 
of the chief theories of crises. 

RESUME 

I. Definition : (a) of a crisis cycle ; of a crisis ; (3) distinc- 
tion between crises and depressions ; (c) types of 
crises — the monetary, financial, commercial, and in- 
dustrial crises ; the economic crisis. 
II. The culmination of a crisis cycle in a crisis accounted for 
by the solidarity of economic interests and modern 
credit. 
III. Importance of the study commensurate with the losses 
inflicted by crises. Social ills reveal important aspects 
of social forces. 

19 



ECONOMIC CRISES 

IV. Difficulty of study caused by (a) the complex, striking, 
unusual, and temporary character of the phenom- 
ena ; (d) untrained observation ; (c) partisan opin- 
ions. 
V. Guiding general facts : (a) crises appeared with the 
present industrial system, with industrial freedom, 
the factory system, foreign commerce, and credit ; 
(d) geographical distribution of crises — the world 
crisis. 
VI. Place of subject in economic treatises. It does not 
adjust itself to the four-part division of economics 
into Production, Exchange, Distribution, and Con- 
sumption. 
VII. Limitations of economic theory : — 

(a) Large number of theories advanced. 
{d) Discussions devoted to local and incidental fea- 
tures. 
(^) Literature growing out of abnormal economic 
crises likely to be worthless. 

(d) Little work of value prior to 1837. 

(e) Undue prominence of the " crash " and of credit 

institutions in studies of crises. 
(/") Theory of crises used as a handle in various 
economic and political discussions. 

(g) French theory and the question of freedom of 
bank-note issue. 

(k) English theory and the Peel Bank Act of 1844. 

(t) German socialistic and scientific contributions. 
Both of value. The latter the most unpreju- 
diced body of discussion extant. 
VIII. Caution regarding apparent and real divergences of 

opinion. 



20 



CHAPTER II 

INDUSTRIAL EQUILIBRIUM 

A PROMINENT place is given in the science of 
economics to the idea of an equilibrium. The 
forces of supply and demand bring about condi- 
tions of equilibrium which are marked by price 
quotations, and which serve as a guide and crite- 
rion for the movement of economic interests. The 
simplest conception of an economic equilibrium is 
that which makes it resemble a pair of scales, in 
which are balanced, on one side, utilities, on the 
other, the costs of production involved. An ex- 
tension of this conception, necessitated by the 
entrance of the evolutionary doctrine into science 
and the introduction of the historical method in 
economics, has regard to changes in the costs of 
production and in men's wants, which are accom- 
modated by an equilibrium ever changing, but ever 
being renewed. The dynamic conception of an 
equilibrium is the only one which can be em- 
ployed in an extended examination of economic 
phenomena. 

The first impression which the crisis gives to 
the student of political economy is that the normal 
adjustment of economic forces has been violently 

21 



ECONOMIC CRISES 

disturbed. The ratios of exchange, indicated by 
prices, are abnormal. They imply the severest 
hardships to the industries of a country. 

Granted that in a crisis the normal relations of 
supply and demand have been destroyed, we may 
ask what are the causes of the disturbance. 

An examination of the literature dealing with 
economic crises shows that the theories which 
have been advanced to answer this question may 
be divided into two classes. First are those which 
assign some specific, immediate, and actuating 
cause, of such a character that no law can be 
formulated as to its recurrence. Second, we may 
group together all those explanations of crises 
pointing out an inherent tendency of industry 
which, when not counteracted, leads to recurring 
periods of distress. 

It may be well, before taking up the study of 
those economic tendencies which lead to crises, to 
group together in this chapter for convenient 
treatment the heterogeneous "accidental" causes 
which have been pointed out by various writers, at 
different times, as the cause of this or that crisis. 
A group of writers, among the most prominent of 
whom is Wilhelm Roscher, have presented the idea 
that the present industrial system tends to pre- 
serve a stable equilibrium, and that there are no 
persistent or recurrent tendencies operating to 
break down the adjustment which normally pre- 
vails between demand and supply. Such writers, 
among whom we may include Nasse, Lugo Bren- 



INDUSTRIAL EQUILIBRIUM 

tano, Garnier, and perhaps Max Wirth,^ scout the 
idea of a definite periodicity of crises, holding that 
they result from unforeseen occurrences, or acciden- 
tal junctures in the life history of trade.^ 

These writers and their followers all recognize, 
however, that the nineteenth-century economy is 
not the same as that which preceded it. Changes 
have taken place which have resulted in making 
industry sensitive to destructive influences once 
unknown. Such changes are the division of labor 
and the application of capital to industry, which 

1 The list of crises-producing causes enumerated by Max Wirth 
is as follows: (i) Harvest failures; (2) Discovery of new deposits 
of coal, metals — particularly of the precious metals; (3) Inven- 
tions; (4) Opening or closing of commercial routes and of mar- 
kets; (5) War and revolutions; and, (6) Leading to depression 
of trade, the depreciation of the currency. " Grundziige der 
National Oekonomie," Bd. Ill, p. 57. 

2 " The germs of crises lie in unusual economic phenomena 
which stimulate production and industry generally to forsake its 
beaten path, and which call forth unwonted activity in various 
parts of the economic organism." — Max Wirth, " Grundziige der 
National Oekonomie," 3 Aufl., Bd. Ill, p. 57. "The feverish 
activity of the market and the abnormal inflation of prices are 
always the result of peculiar causes, for the operation of which 
the previous depression of industry has, indeed, prepared the 
way, but which exert throughout an independent, actuating influ- 
ence. Periods of depression give way to a gradual revival of 
commerce when such peculiar causes are not present, or when 
the evolution is not suddenly interrupted by such disturbing events 
as war or the declaration of peace. Such a trade revival continues 
uninterrupted, unless checked by some new disturbing influences." 
— Nasse, " Ueber die Verhiitung der Productionskrisen," Jahrbuch 
fur Gesetzgebung, Bd. Ill, N. F. 1879, p. 150. Cf. Roscher, 
"System der Volkswirthschaft," Bd. Ill, p. 783. 

23 



ECONOMIC CRISES 

increase the interdependence of industrial units. 
These also, by lengthening the chain of connected 
productive processes, lengthen the time during 
which disturbing changes may occur. Both the 
solidarity and the sensitiveness of business condi- 
tions are increased by the use of credit. It was 
with the economy and moral beauty of credit in 
mind, but yet remembering the crisis, that Roscher 
spoke of crises as "the shadow side of progress 
itself." 3 

Under some circumstances the industrial system 
may be said to be in unstable equilibrium, as when 
a country possesses a system of unsound banks or 
an unregulated paper currency. The course of 
foreign commerce is usually recognized as less sta- 
ble and reliable than that of home trade. Hence, 
the growth of international commerce opens the 
trade of a country to many new disturbing influ- 
ences. Agriculture and the other extractive in- 
dustries are less susceptible to injury than are 
manufacture and commerce, because the goods 
which they produce are in the least possible de- 
gree specialized, and therefore sealed for specific 
commercial uses. These industries are adaptive, 
since, if one outlet is closed, the goods may be 
fitted for another use. Each branch of manu- 
facture must follow the course of some specific 
demand, and commerce must suffer by any read- 
justment of supply and demand areas. We may 

3 Roscher, " Ansichten der Volkswirthschaft," Bd. II, Sec. 4, 
p. 385- 

24 



INDUSTRIAL EQUILIBRIUM 

say furthermore that capital invested in agriculture 
is not so rapidly impaired while lying idle as is 
capital invested in manufacturing and commercial 
enterprises.* The bonds of credit linking these 
various parts of a country's industries together by 
credit and debtor relations put the whole economic 
organism in a position to suffer from the reverses 
which come to the least stable elements compos- 
ing it. Whatever in any way extends the market, 
therefore, or complicates business, if it is accom- 
panied by a corresponding increase in economic 
solidarity, makes larger the area within which 
crisis-producing causes may appear. 

Having noticed how liable the machinery of in- 
dustry is to become deranged, it remains to con- 
sider that group of the actuating causes of crises 
which has been selected for treatment in this chap- 
ter, namely, the unpredictable ones. Beginning 
with those considerations which belong to the 
department of Production, in economic science, 
we may first mention invention, which has for its 
immediate effect a revolution in the technique of 
some industry. Invention changes the proportions 
in which the factors of production are related to 
one another in industry, readjusts industries to one 
another in the scale of importance, and changes 

* The varying degrees of sensitiveness to derangement which 
economic enterprises display is an important consideration in con- 
nection with the laying of taxes, for it determines in a measure 
the reliability of the various sorts of public revenue. Cf. H. G 
Adams, "Taxation in the United States 1 789-1 8l6 " (Johns Hop- 
kins Studies), Vol. II, pp. 69, 70. 

25 



ECONOMIC CRISES 

the territorial relations of producing areas. The 
gradual accumulation of improvements, which is 
often allowed to grow unheeded by capitalists 
whose money is invested in equipped plants, forms,- 
from time to time, a crushing advantage for new 
enterprises starting with all the latest devices 
known to the trade. During the early part of 
the century the advent of a new invention was 
not accompanied with great loss of fixed capital, 
because at that time capital was for the first time 
let into the productive process on a large scale by 
these inventions, and the change meant the use of 
expensive equipment for the first time. At pres- 
ent great inventions are coming more and more 
to mean the destruction of large amounts of fixed 
capital, which have been invested to utilize pre- 
vious inventive achievements. 

The opening of a new means of communication 
has an effect in some respects similar to that of an 
invention. The European markets were convulsed 
by the opening of the Suez Canal. The opening 
of a new market has frequently, in the past, led 
to ill-advised productive activity, resulting in great 
loss. The requirements of a new market are at 
first imperfectly understood, especially if it is in 
an undeveloped country. Optimism and the love 
of stimulating news serve generally to exaggerate 
the importance of an unknown demand. One has 
only to recall the "Mississippi Scheme" of 1718 
and 1719 and the "South Sea Bubble" of 1720 
in confirmation of this. Overestimation of the 

26 



INDUSTRIAL EQUILIBRIUM 

markets of Brazil and of Spanish America con- 
tributed principally to the distress in England in 
1 8 10. In 1824 and 1825 the markets of Peru and 
Mexico were overestimated, and in 1843 those of 
China were likewise. European manufacturers 
have been prone to ship what they wanted to sell, 
as regards assortments, quality, and style, rather 
than what the market demanded. A realization 
of the importance of early establishing trade con- 
nections, in order to " hold the field " against com- 
petitors, leads to activities which anticipate in too 
great a degree the development of a new field. 
This leads to such conditions as prevailed in Cali- 
fornia in September, 1850. When a collapse does 
not follow the first receipt of accurate information 
regarding the condition and capacity of a new 
market, a second stage of the process is entered, 
in which European capital and methods are rashly 
applied to stimulate the local industries. When 
the crash, which is almost certain to come, lays 
low the colonial industry, European houses con- 
nected therewith are often brought down in the 
general ruin. This is illustrated by the case of 
the Baring failure in England in the summer of 
1890. Unfounded trade expansion in the home 
countries, such as that which was connected with 
the opening of California, is not likely to occur in 
the future, because of the improvement of means 
of communication ; but the hasty and inconsider- 
ate application of European methods in a tropical 
climate, with strange flora, fauna, and with non- 
27 



ECONOMIC CRISES 

European people, to bring about a forced growth 
of industry through the use of European capital, 
is likely yet to lead to trouble. 

The laying of import duties, a practice common 
among new countries after reaching a certain stage 
of development, offers a prolific cause of uncer- 
tainty in trade with new markets. A tariff brings 
about an artificial distribution of industry which 
then must hang upon the course of legislation and 
indirectly upon the fortune of political parties. 
A tariff in a growing country must be revised 
from time to time. Furthermore, a tariff tends 
to build up interests which exert a pressure to 
secure revisions advantageous to themselves. The 
system must therefore be pronounced an unstable 
one. The history of tariffs shows that the system 
is " a thing of shreds and patches." In connec- 
tion with crises the unstability and artificiality of 
tariffs is the chief subject of remark.^ 

fi The opinion of the business men of this country who are not 
intrenched in monopolies may be judged from the well-indorsed 
sentiment of the National Board of Trade, as expressed in Wash- 
ington in January, 1895, ^y Mr. Helman of Cleveland: "The 
gravest dangers from present methods of tariff discussion and 
legislation are found in the constant menace to the business 
interests of our country. History tells us that the various changes 
from low to high and high to low tariff between 1S32 and 1880 
led to periods of undue inflation, great demoralization, prosperity, 
and depression. Uncertainty has always acted as a damper on 
trade, and even the mere suggestion of a possible change in 
revenue rates has operated to unsteady business and hinder pro- 
duction. In the language of the resolution presented to this 
body, twice within the last two years have we, by overwhelming 

28 



INDUSTRIAL EQUILIBRIUM 

In this connection attempts to form monopoly 
may be mentioned. When these attempts are in 
the form of getting " a corner " on the market, 
great and possibly destructive price fluctuations 
may result. Attention must be called to the char- 
acter of the trust wars, at present becoming famil- 
iar to us, and in all probability to be made more 
familiar in the future. These struggles may al- 
most be called the wars of the giants. The invest- 
ments of capital and the numbers of wage-earners 
involved are so great as to make them a matter 
of public solicitude. 

A cause of crises, which may be considered to 
fall under the head of Exchange in economics, is 
the course of the precious metals. As these metals 
form the most important elements of the exchange 
medium of trade, and as every socio-economic 
activity is influenced by changes in the medium 
of exchange, the circumstances which affect the 
value of gold and silver are most important.^ The 
value of these metals is, in a greater degree than 

majorities, reversed the national system of raising revenues, and 
twice placed in jeopardy the business interests of the country by 
making uncertain for months the outcome of legislation touch- 
ing the exchange value of every article in trade. Every observer 
knows that there need be no actual legislation to involve great 
risk. The mere suggestion of possible action is sufficient to stir 
the commercial world and to produce alarm and even serious 
disturbance in trade." — "Proceedings," 1895, PP- '3°» ^3^* 

^ Emile de Laveleye considers that the fluctuations occasioned 
by the settlement of the balance of trade and the resulting move- 
ment of the precious metals are responsible for crises. " Revue 
des Deux Mondes," 1865, pp. 445 ff. 

29 



ECONOMIC CRISES 

is true of most other substances, dependent upon 
legislation. This suggests a source of economic 
insecurity. The crisis of 1893 in the United 
States was, in part, due to distrust of the integrity 
of our currency, caused by the operation of the 
Sherman Law, and by the existence of a strong 
free silver sentiment. The physical conditions 
governing the supply of gold and silver are also 
to be considered. The assertion has been made 
by Schaffle, Gustave du Puynode, and others that 
the increase in the production of gold, following 
upon the discovery of the California fields, lowered 
the rate of interest in Europe and stimulated 
speculation, resulting in a number of crises, prom- 
inently that of 1857.7 The Committee of the 
House of Commons appointed to inquire into the 
causes of the crisis of 1857 reported that specula- 
tion had been especially increased by three circum- 

' For a discussion of this, see Schaffle's article in " Zeitschrift 
fur d. gesammte Staatswissenschaft," Bd. XIV, 1858, pp. 469, 470, 
also in "Deutsche Vierteljahrsschrift," 1858, Heft I, p. 327. Puynode, 
in "Journal des Economistes " for March, 1858, p. 458, argues the 
same cause for the crisis of 1857 in the United States. For a 
discussion of the influence of the scarcity of gold and demone- 
tization of silver upon trade since 1882, see Robert Giffen's 
"Essays in Finance," 2d Series (N. Y.), 1886, Essay I: "Trade 
Depression and Low Prices," Part IV; "The Question of Gold 
Scarcity," pp. 22-28. Cf. Dr. Wm. Scharling, "Die jetzige Ge- 
schaftsstille und das Gold," Conrad's " Jahrbuch," Bd. II, N. F., 1885, 
pp. 189-219, and pp. 289-312; also J. E. T. Rogers in "Prince- 
ton Review," Vol. Ill, N. S., 1879, Article "Causes of Commercial 
Depressions"; Stephen Williamson, "Contemporary Review," Vol. 
XXXV, 1879, Article "Bad Trade and its Cause," Part I, pp. 121- 
131. 

30 



INDUSTRIAL EQUILIBRIUM 

stances : (i) The extension of foreign trade ; (2) A 
great importation of gold and silver; (3) The econ- 
omies in the use of money made possible by the 
practice of banking. 

The productive process may be considered 
relatively stable and dependable, in comparison 
with the capricious movements of demand. The 
unexpected in industry usually makes itself felt 
first from the side of demand. We do not suffi- 
ciently understand the process by which wants rise 
and propagate themselves among the individuals 
composing society ; hence there is to us always an 
element of the unexpected in the movements of 
demand. There occurs to the mind at once the 
influence of fashion. Undoubtedly the word " fash- 
ion " has been overworked in this connection and 
made to stand for a variety of forces governing 
the movement of wants. Undoubtedly also many 
producers who complain loudly of the uncertainty 
of fashion have themselves to thank for nourish- 
ing a change of demand to put movement into the 
commodity market. A review of modern changes 
in production and consumption strongly indicates 
that these two complementary parts of the eco- 
nomic process are growing more and more unUke 
and are with more and more difficulty adjusted to 
one another. Production, employing machinery, 
and a strictly classified labor personnel under a 
complete system of organization pours forth vast 
quantities of goods of which each unit exactly 
resembles the other. To secure the economies 

31 



ECONOMIC CRISES 

inherent in this system there is demanded above 
all things stable and uniform conditions over wide 
areas. Demand on the contrary, influenced by 
general education and the quickening of intellect- 
ual movements, and encouraged to nicety by the 
great variety of goods available to choose from, is 
becoming more uncertain and more subject to 
whims and fads than ever before. The increase 
in the income of the wage-earning classes increases 
their power and desire to individualize their con- 
sumption. The smaller an income the more pre- 
dictable is the expenditure resulting from it as it 
is mortgaged to the necessities of life. The larger 
the income the larger the disposable surplus set 
free to form an unpredictable demand. 

To this list of crisis-inducing influences may be 
added one or two which cannot be grouped accord- 
ing to the customary divisions of economics. 

It is a fact, known to every one, that war operates 
powerfully to restrain certain kinds of consump- 
tion and to increase other kinds. The " Chicago 
Tribune" of December 31, 1898, published a very 
interesting table, in the course of a review of the 
industry of Chicago, to show what industries were 
stimulated by the Spanish war, what were depressed, 
and what unaffected. In the first class are placed 
industries connected with drugs, groceries, farm 
produce, grain, flour, iron and steel, leather, paper, 
packing cases and clothing. To this might be 
added the newspaper and photographic industries, 
the trade of American resorts and the manufacture 

32 



INDUSTRIAL EQUILIBRIUM 

of powder, bunting and flags, brushes, etc. Among 
the industries depressed were those connected with 
boots and shoes, real estate, building material, lum- 
ber, and beer. The bicycle industry was depressed 
and trade on the Board of Trade was lessened. 
The industries not affected were connected with 
coal, furniture, hardware, jewellery, and millinery. 
Banking was also unaffected. Not alone does war 
disturb the course of industry of those nations 
engaged in it, but of many others as well. Neutral 
powers may have their markets destroyed, or their 
sources of raw material cut off, or may suffer from 
necessary changes in the routes of commerce. 
Again, neutral powers are tempted to expand their 
production in the hope of gaining a stolen march 
upon their competitors temporarily handicapped. 
The first great crisis of the nineteenth century, 
that of 1815 in England, was caused by the exag- 
gerated hopes of English merchants that they 
would be able to control the continental markets 
at the close of the Napoleonic wars.^ War is an 
abnormal condition, but when it is long continued 
industry adjusts itself in a measure to its influence. 
The passage back to peace may then be a readjust- 
ment accompanied by anxiety and distress, until 
the situation of trade is again definite. 

The delicately poised industry, which is in these 

8 Sir Fr. Baring considered the unexpected declaration of war 
to be one of the chief causes of the crisis of 1 793. " Observations 
on the Bank of England," p. 19. Tooke, however, disputed this. 
"History of Prices," Vol. I, p. 177. 

D 33 



ECONOMIC CRISES 

days built up through the instrumentality of credit, 
may suffer derangement through the failure of a 
staple crop, through the collapse of a mining 
excitement, or in the puncture of the bubble of 
over-capitalization of joint stock concerns. The 
whole industry of a country may suffer in a de- 
rangement having its origin and cause in some 
one trade. It has even been maintained that in 
certain critical seasons a general convulsion has 
followed as the result of the disastrous collapse of 
some one great individual concern. This extreme 
statement is frequently to be met with in the litera- 
ture devoted to the crisis of 1857 in .the United 
States. That crisis is attributed by some to the 
failure of the Ohio Life Insurance and Trust Com- 
pany, having a capital of $2,000,000 and a deficit 
of ;^20,ooo. This is, of course, no more an expla- 
nation of the crisis of 1857 than was the failure of 
the Cordage Company on May 5, 1893, the cause 
of the crisis of 1893. 

Such an enumeration of the causes of crisis as 
the preceding, while, perhaps, fair enough and free 
from partisan bias, and while elastic and compre- 
hensive, is unsatisfying. Roscher has been justly 
praised for early according a place to the discus- 
sion of crises. His writings have been called pre- 
eminently fair. This is because what he has given 
us is virtually a blanket theory — an explanation 
encyclopaedic rather than truly interpretative. An 
enumeration similar to the one given above can 
afford us no criterion to judge the future. Accord- 

34 



INDUSTRIAL EQUILIBRIUM 

ing to the " Equilibrium " theory, the cause of each 
crisis is some unusual conjecture which must be 
sought in the study of the events immediately pre- 
ceding the crisis. The recognition of the delicacy 
of the industrial adjustment is merely an indirect 
way of saying that the precipitating cause of a 
crisis may be in itself something inconsequential 
in comparison with the string of events which it 
sets in motion. This takes the matter out of the 
general into the particular, and hides the roots of 
the problem in accidental and personal details 
beyond the reach of scientific study.^ The con- 
clusions to be drawn from this are that the causes 
of crises are innumerable, that no important classi- 
fication can be made among them, and that all 
true causes are equally important.^^ The discus- 
sions contained in the following chapters may be 
considered in the light of an answer to this 
position. 

^ " One can see that the ultimate cause of such crises must be 
an organic failure, and that the source from which the repetition 
of the phenomenon takes its rise must be sharply distinguished 
from the individual circumstances connected with each crisis. 
It is obviously a superficial procedure to fix attention on the 
incidental character of the crisis phenomenon, and therein to 
find the real, and in part predictable, law without coupling with 
this the search for the ultimate causes which account for the 
entire series of similar phenomena." — E. Duhring, "Cursus der 
National- und Socialokonomie," pp. 236, 237. 

1^ " The causes of such an economic disease are most numerous. 
Every circumstance which suddenly and largely increases produc- 
tion or decreases consumption or which even disturbs the ordinary 
course of industry must bring with it a commercial crisis." — 
RosCHER, " Ansichten der Volkswirthschaft," Bd. II, Sec. 5, p. 391. 

35 



ECONOMIC CRISES 

Passing to the consideration of the remedies 
which are proposed or suggest themselves in con- 
nection with this Ust of causes, we have to observe 
that they must of necessity be as numerous and 
desultory as are the causes which they are to 
counteract. Alleviative rather than preventive 
measures are proposed by the adherents of the 
" Equilibrium " theory. First, as regards capital : 
During a financial panic persons who, in ordinary 
times would be perfectly solvent, are liable to 
have their property swept away, at a merely nomi- 
nal valuation, in order to purchase cash in a strin- 
gent money market with which to pay a small 
obligation. To meet this emergency the state may 
issue a paper currency which may either draw 
interest, or be taxed to secure its rapid retirement 
after it has served its purpose. This aid may 
be made effective by advancing money to private 
parties upon security of property including stocks 
of goods.^^ The trial of this scheme in the United 
States in 1873 condemned it as tending to revive 
speculation, to create an unhealthy dependence 
upon government, and as offering a relief from the 
due effects of unwise and dishonest financiering. 

To afford an equal relief to labor the local units 
of government may give employment to those who 
are out of work. If it is deemed unwise for the 
state to affirm the "right of work," this may be 
done under the plea of taking advantage of a 

11 Roscher, " Ansichten," Bd. II, Sec. 16, B. 
36 



INDUSTRIAL EQUILIBRIUM 

favorable market. In behalf of such public expen- 
diture it may be urged that persons so employed 
would become a charge upon the public if not 
aided in some such manner. 

Little can be done to diminish the force of such 
reorganizing influences as invention, the opening 
of new means of communication, or the opening 
of new markets. Nothing short of a comprehen- 
sive reorganization of industry such as is proposed 
by the socialists would avail much. The same 
may be said of the wars of trusts and monopolies. 
It is to be observed that legislation to restrict trusts 
and monopolies has been ineffective thus far in 
the United States. In regard to the risks con- 
nected with changes in tariff or monetary legisla- 
tion the remedy suggests itself. To forecast, and 
in some degree diminish the uncertainties of 
demand, the sovereign remedy is statistical in- 
quiry. It is a remarkable fact that almost without 
exception every important writer upon crises has 
emphasized in the most unmistakable manner 
the necessity of enlarging the scope of govern- 
ment statistical investigations.^^ Statistical bureaus 
should not only undertake investigations on their 
own account, but should give the utmost pubUcity 
to valuable statistical information gathered by pri- 

12 Roscher says : " Had each producer and tradesman an accu- 
rate and continuous knowledge both of the extent of demand and 
of the number and capacity of his competitors, a serious crisis 
would scarcely be possible." — ** System der Volkswirthschaft," 
Bd. Ill, Ch. II, Par. 175, A. 

37 



ECONOMIC CRISES 

vate persons and trade organizations and societies. 
If, as John Stuart Mill said, the laws of consump- 
tion are the laws of human enjoyment, then the 
process of consumption cannot be extensively regu- 
lated by legislation without serious loss of freedom 
and enjoyment.^^ The next best thing is to subject 
the phenomena of consumption to serious study in 
order that we may at least foresee, if we cannot 
control events. In this connection it may be per- 
missible to add a brief explanation of the plans 
for the statistical study of consumption proposed 
by the late Dr. Ernst Engel, of Berlin, formerly 
the Chief of the Prussian Statistical Bureau. This 
eminent statistician proposed, through the study 
of budgets of private expenditure, to discover the 
laws of consumption. If changes in demand can 
be foreseen, it will greatly facilitate the adjustment 
of supply to demand. Dr. Engel himself exam- 
ined the expenditures of thousands of Prussian 
families and formulated the following four propo- 
sitions : " First. That the greater the income, 
the smaller the relative percentage of outlay for 
subsistence. Second. That the percentage of out- 
lay for clothing is approximately the same, what- 
ever the income. Third. That the percentage of 

13 " p^ systematic direction of production without freedom of 
demand and freedom in the choice of occupations would be, 
while not precisely unthinkable, accompanied by the destruction 
of civilization and all that which makes life worth living. To 
harmonize the systematic direction of all industry with freedom 
of demand and of the choice of occupation is a problem which 
can only be compared with the squaring of the circle." 

38 



INDUSTRIAL EQUILIBRIUM 

outlay for lodging, or rent, and for fuel and light, 
is invariably the same, whatever the income. 
Fourth. That as the income increases in amount, 
the percentage of outlay for sundries becomes 
greater." ^^ Few subjects of economic research 
appear to offer greater rewards to the student 
than does this one. 



RESUME 

L Economic equilibrium — static conception — dynamic 

conception. 
IL Grand divisions of crisis theories. 

1. A stable equilibrium disturbed by unpredictable 

causes. 

2. An unstable equilibrium eventually ruptured by 

steadily operating cumulative forces. 
in. School adhering to the first class of theories — Roscher. 
IV. Sensitiveness of modern industry to disturbances caused 
by {a) division of labor, (Jj) lengthening of 
economic forecasts, {c) use of credit (special 
case of unsound banks and unregulated 
paper currency), (^) foreign trade, {e) in- 
crease of elaborative as opposed to extrac- 
tive industries. 
V. Unpredictable causes of crises grouped according to the 
departments of economic science. 
I. Production. 

(<z) Inventions — destruction of invested capital. 
(J)) New means of communication — new markets 
misjudged — exploitation of new markets 
— of the tropics. 

1* " Report of Massachusetts Bureau of Statistics of Labor," 1885, 
p. 152. 

39 



ECONOMIC CRISES 

(^) Changes in tariffs. 

{d) Monopolies — trust wars. 

2. Exchange. 

(e) Course of the precious metals — monetary 
legislation. 

3. Consumption. 

(/) Changes of fashion — divergence in the ten- 
dencies governing production and those 
governing consumption. 
VI. Miscellaneous causes. 

{g) War — effect upon different industries, 
(/z) Crop failures. 

(/) Failure of a single great business concern. 
VII. Unsatisfactory character of such an enumeration of 

causes. 
VIII. Remedies — alleviative rather than preventative. 

{a) For capital — temporary issue of paper currency. 
(^) For labor — employment on public works. 
(^) Legislation affecting commerce. 
(^) Statistical information to adjust supply to de- 
mand. Engel's plan — his four laws of 
budgets. 



40 



CHAPTER III 

CRISES AND THE ORGANIZATION OF INDUSTRY 

As crises are evidences of a lack of adjustment 
between economic forces, they naturally suggest 
the question, Who are the men whose business it 
is to direct industry, and with what equipments 
are they provided for the discharge of their duties ? 
Inquiry as to the character of the machinery which 
controls the larger movements of industry reveals 
one of the serious weaknesses of the present eco- 
nomic order. While the organization and control 
of the internal affairs of business units have been 
well looked after, there have been developed as 
yet few efficient means of facilitating the coordina- 
tion of the activities of the various economic units 
according to a general and sufficient plan. There 
is a lack of means for supplying information as to 
the general present and future conditions of the 
market, and for subordinating individual producers 
to the dictates of a comprehensive and rational 
policy. 

The changes which took place during the "Indus- 
trial Revolution" were primarily changes in the 
technical processes of manufacture. In order to 
accommodate these new processes many changes 

41 



ECONOMIC CRISES 

have been rendered necessary in the organization 
of the factors of production. The proportion of 
capital employed has been increased. The intro- 
duction of machinery has necessitated elaborate 
structures and the use of steam power. The work- 
shop and the tools have grown into a factory. 

The division of labor has been greatly furthered, 
and this has necessitated the gathering of work- 
men into great communities where all depend upon 
the turning of the same chance of the markets. 
This concentration of productive forces means an 
extension of the market. The evolution which has 
drawn men together as producers has separated 
producers from their markets both by distance, 
time, and general social and economic relations.^ 
Under these conditions, when an industry is 
depressed it means a concentration of suffering 
in a few localities. The difficulty of bringing 
together a body of expert workmen and the diffi- 
culty of providing for them if discharged en masse 

1 John A. Hobson says of the effects of machinery : " Again 
the growth of machinery makes industry more intricate. Manu- 
facturers no longer produce for a small known market, the fluctua- 
tions of which are slight and easily calculable. The element of 
speculation enters into manufacture at every pore, — size of mar- 
ket, competitors, and price are all unknown. Machinery works 
at random like the blind giant it is. Every improvement in com- 
munication and each application of labour-saving invention adds 
to the delicacy and difficulty of trade calculations. Hence in the 
productive force of machinery, we see the material cause of the 
violent oscillations, the quiver of which never has time to pass 
out of modern trade." — "Problems of Poverty," London, 1891, 
P- 34. 

42 



THE ORGANIZATION OF INDUSTRY 

are circumstances leading employers to continue 
operations when the conditions of the market are 
unf avorable.2 Large capital also calls for continu- 
ous use regardless of the fluctuations of demand. 

The length of the productive process has been 
increased, if not in time, at least as regards the 
number of hands to which the various parts are 
intrusted, A cause of misunderstanding is thus 
introduced. The division of functions is so great 
that even makers of complementary goods and 
parts of composite products lose sight of one 
another. As the sphere of the operations of each 
unit is narrowed the difficulty of keeping informed 
as to the whole process and of regulating one's 
activities accordingly is increased. 

Changes in demand of no less momentous char- 
acter have taken place. It is true that the market 
open to any single producer is now geographically 
much wider than ever before, but every part of 
this field is now operated upon by causes tending 
to produce uncertainty such as the producer for a 
local market formerly never experienced. The 
character of our culture, which has emphasized 
freedom and individuality, has made the economic 
conduct of the buyer difficult to predict.^ Custom 

'•^ Herkner, "Die Ober-Elsassische Baumwollindustrie," Strass- 
burg, 1887, p. 257. 

3 Fashion, by laying emphasis upon artistic qualities of goods 
and by demanding ever new forms, prevents, in some degree, the 
application of the methods of the factory system to the produc- 
tion of these goods. In so far as this is true and as fashion 
demands personal services and hand-made goods, its changes do 

43 



ECONOMIC CRISES 

formerly marked clearly defined limits within which 
prediction was possible. As customs have lost 
their force, these scanty rules have slipped from 
the Rands of an anxious trade to be replaced by no 
equally adequate means of reading the markets. 
The city or district market once held by the local 
merchant or guild has now become commercially 
fluid and mobile and responds to the influence of 
causes as various and remote as the circumstances 
of production the world over. 

The movement of the masses out of ancient and 
established conditions into new industry and intelli- 
gence has given to our age the characteristics of a 
transitional period in which economic forecasts 
share the uncertainty of political and social pre- 
diction. The growth of means of communication, 
and the removal of barriers to trade, stimulate a 
rapid change of ideas and economic wants. The 
growth of city life increases the variability of con- 
sumption, for changes in the taste of city people 
are rapid, and the power of choosing substitutes in 
consumption is greatest in cities. One concomi- 
tant of a quickened social intercourse is the growth 
of the power of fashion. A more rapid change of 

not fall upon the machine industry. As the root idea of fashion 
is to express superiority or exclusiveness of social standing 
through the possession of objects or manners not possessed by 
others, fashion frequently discriminates against machine-made 
goods because of the abundance and similarity of the product. 
An article is likely to be dropped from the list of those used to 
express social standing when it has been once firmly seized upon 
by machine industry. 

44 



THE ORGANIZATION OF INDUSTRY 

fashions takes place as the competition for social 
preeminence is increased. 

The relations which foreign and domestic de- 
mand sustain to one another may, under certain 
conditions, be the cause of a peculiar and recur- 
rent disturbance of trade. A country which has 
been suffering from depression, if its merchants 
are enterprising, may build up a foreign trade, 
depending upon the attractive power of the low 
prices offered. Upon the recovery of local demand 
a period of intense activity may follow, during which 
the foreign demand persists and the newly awak- 
ened home demand is added to it. This home de- 
mand, if business prospects are fair, is likely to be 
abnormal, since stocks which have been kept low 
and equipment which has been allowed to wear 
out must now be replaced. 

The abnormal demand brings about a rise in 
prices. In order to satisfy the home demand, and 
since foreign trade can no longer be attracted by 
low prices, the latter is neglected and falls off. 
Subsequently, when the home demand is reduced 
to normal proportions, a surplus of unsold products 
begins to emerge which seeks a foreign outlet. 
But since foreign trade is only slowly built up and 
since it has been neglected, this channel does not 
offer a ready outlet to producers. The consequence 
is over-production which brings on a depression. 
This cycle of foreign trade may repeat itself again 
and again. It is this sort of danger coupled with 
the danger of overcapitalized industries which 

45 



ECONOMIC CRISES 

threatens the United States at the present 
time. 

The localization of industry requires an extensive 
machinery to spread products evenly over the area 
of consumption. Between the producer and the 
consumer an immense amount of complicated 
machinery has been erected so that it is difficult, 
if not impossible, for them to trace each other's 
movements. The relation between the two has 
become an impersonal one hard to forecast before 
the actual cash nexus is formed. In this respect 
it little resembles the direct relations which were 
once maintained between the village shoemaker 
and his neighbors, who were at once his patrons 
and friends. The growth of means of transporta- 
tion has accustomed the producer to look to a dis- 
tance for his market, and the consumer* to hold in 
equal esteem supplies coming from any quarter 
or any distance. Modern credit and facilities of 
exchange permit the most lively interchange of 
influences between all parts of the economic field. 
Upon so large a field no producer can single- 
handed compass the problem of understanding 
the market. The number of the competitors is 
unknown, and so is their producing power. The 
changes of the market are more or less of a riddle. 
Calculations based upon the conditions at home 

* G. Schmoller attributes " the size and the increase of our 
crises chiefly to the astonishing growth of commercial transactions 
now carried on with all parts of the world." — "Jahrbuch fiir 
Gesetzgebung," Jahrgang 1886, p. 601. 

46 



THE ORGANIZATION OF INDUSTRY 

may be upset by a failure of Russian harvests, 
by a revolution in South America or legislative 
changes in Europe, by an invention or trust in 
the United States or a subsidized industry in 
Canada. 

The result is that the problem of determining 
the nature and extent of demand is an extremely 
difficult one for the individual producer even when 
equipped with long experience and the best avail- 
able means of information. So it has been held 
that while these changes have been taking place 
in production and in demand and in the range and 
nature of competition an adequate change has not 
taken place in the methods and institutions used 
to study the nature of industry and to direct the 
organization of industrial forces. The productive 
power of industry has in a half century been as- 
tonishingly increased, but it is claimed that the dis- 
tribution of this power, considering the industrial 
problem as a whole, has been relatively planless 
because an equal advance has not been made 
in methods of organization and control. Private 
individualistic control is the rule for much of 
productive property. Capital and the division 
of labor which have accompHshed so much in 
increasing production have not been sufficiently 
applied to the solution of the problem of the mar- 
ket. In short, the machinery of management has 
not developed pari passu with the technique of 
production. The chief obstacle which prevents 
the growth of comprehensive governing agencies 

47 



ECONOMIC CRISES 

is the fact that production is carried on for private 
gain. The presence of individual interests pre- 
vents certain very desirable forms of cooperative 
action. Exceptional ability to comprehend the 
workings of industry is guarded for private use 
so that it may contribute to private gain. So also 
information which would be of the utmost advan- 
tage to trade as a whole, if made public, is guarded 
in secrecy to serve as a source of private gain. 
Production takes place where, when, and in the 
measure that individual organizers and capitalists 
believe it will result in profit to themselves. Such 
production must inevitably be irregular, slow to 
adapt itself to social needs, and inadequate to sat- 
isfy many legitimate desires. Private enterprise 
will not take hold of economic problems, no matter 
how desirable their solution may be to society, 
unless a resultant private gain can be distinctly 
seen. But private self-interest puts more than 
negative difficulties in the way, for it frequently 
begets endeavors to produce abnormal and artifi- 
cial relations between demand and supply in order 
to secure ratios of exchange which are profitable 
to the private interests concerned. 

In spite of the splendor of isolated achievements 
in the construction of great businesses, there is 
some ground for saying that the lack of a well- 
coordinated system of control makes industry re- 
semble, at present, a mob rather than an army. 
Indeed, the headlong passion of the mob in which 
each stimulates the other, and because there is no 



THE ORGANIZATION OF INDUSTRY 

plan things are overdone, resembles somewhat the 
stress of competition which when unrestrained 
ends in over-production. 

Individualistic production for a market which 
cannot be understood without the cooperation of 
extensive agencies cannot result otherwise than in 
confusion. Such conditions always favor concen- 
tration and tend to work out their own cure through 
the one-man system. The climax of uncertainty is 
war ; hence the significance of such war terms as 
"captains of industry" used in business. But 
business must go on, and when accurate informa- 
tion fails, speculative estimates take its place, and 
the optimism which is a mental trait of vigorous 
natures leads the producer to forge blindly ahead 
at full speed, attending only to hear the crash of 
some less fortunate rival's business. Our present 
solidarity is such that if one firm increases its out- 
put, others must do the same to secure equal econ- 
omies in production and avoid being edged out of 
the market.^ The result of such a system, or 
rather lack of system, is misdirected production. 
When this is sufficiently serious it impairs credit 
and brings about total derangement of the market 
in the form of the crisis. 

If it is individual self-interest which prevents 
such an organization of industry as would prevent 
crises, we have evidence that self-interest may 
defeat its own purposes. As Dr. Leete says in 
Edward Bellamy's " Looking Backward," ** I sup- 

^ Wasserrab, " Preise und Krisen," p. 65. 
E 49 



ECONOMIC CRISES 

pose that no reflection would have cut the men of 
your wealth-worshipping century more keenly than 
the suggestion that they did not know how to make 
money. . . . Selfishness was their only science, 
and, in industrial production, selfishness is suicide." 
The problem of the employment of capital, which 
will be taken up in the next chapter, is closely con- 
nected with this matter of the managerial ability 
displayed in industry. So far as there is at the 
present time any problem of oversaving, it is only 
superficially viewed as a misadjustment of final 
consumption to the productivity of industry. It is 
really an indication of the lack of organizing abil- 
ity because of which wages and interest are low 
and profits high while industry fails to keep pace 
with the growth of new wants. 

In as far as the line of argument which has been 
here followed is valid, the crisis is merely one of 
many symptoms of a lack of plan and organized 
effort in the management of productive forces. It 
has been claimed that the business field and the 
amount and complexity of business transactions 
have increased much more rapidly than the size 
and power of the individual business unit. The 
result is that each unit is less able than before to 
control the conditions affecting it. But it may 
also be asserted that the producing power of the 
business unit has increased more rapidly than its 
orienting and directing power. 

To provide the necessary organization, it is de- 
sirable that there should be a movement both from 

50 



THE ORGANIZATION OF INDUSTRY 

the side of private and public initiative. There 
are forces in operation at present tending to se- 
cure greater dependability of economic conditions. 
We have already spoken of the demand for uni- 
formity made by the modern system of production. 
A large investment of capital makes the continu- 
ous exploitation of a business a prime factor in 
securing economy of production. So with the 
skill expended in securing a competent body of 
workmen, and in perfecting plans of operation. 
As the amount of capital and brains necessary to 
set a business " on its feet " increases, the crisis 
will obviously lay a greater burden of loss upon 
the capitalist and manager, and a less proportional 
loss upon labor. Forces are thus set in motion to 
secure uniformity. The chief direction in which 
these forces have thus far exhibited themselves has 
been in the elimination of competition by the forma- 
tion of trusts and monopolies.^ But there are other 
lines in which they might operate with equal effi- 
ciency and intelligence. 

Whatever increases the size of business units by 
reducing the number of independent unknown ele- 
ments in the business situation simplifies the prob- 
lem. As Hon. Carroll D. Wright of the United 

6 Stieda, " Die deutsche Hausindustrie," Abschnitt II, Par. 19; 
"Die Krisen und die Hausindustrie," pp. 104, 105; also Moritz 
Mohl, ** Ueber die Wiirttembergische Gewerbsindustrie," Stutt- 
gart, 1828, p. 408. Note the railway consolidation in England 
following the crisis of 1847, ^"^ ^^^ pooling and consolidation 
in the United States after 1873, and the rapid formation of trusts 
during 1898 and 1899 in the United States. 

51 



ECONOMIC CRISES 

States Department of Labor says in his report on 
Industrial Depressions, " If the employers in any 
industry would combine under an organization that 
should have positive coherence, there would be no 
difficulty, so far as that industry is concerned, in 
regulating the volume of production in accordance 
with the demand." It may very well be, however, 
that a means of solving a difficulty may not be com- 
mendable because it creates greater difficulties than 
it adjusts ; and this is true of a part of the present 
movement toward monopoly. 

The time once was when the ownership and 
control of property were largely coincident. We 
have been gradually, and for the most part uncon- 
sciously, growing away from those conditions in 
our endeavor to secure the economies of modern 
production, and at the same time retain the institu- 
tion of private property unchanged. So long as 
the ownership and the control of property are 
closely connected, the utmost tendency toward 
consolidation in either of them will fix the meas- 
ure of its realization in the other. The tendencies 
now observable to separate ownership and control 
may provide a means of superior business organi- 
zation without sacrificing any fundamental princi- 
ple of our industrial order. 

The growth of monopolies will become increas- 
ingly difficult as the sphere brought under their 
control increases, because of the pressure of free 
capital to find investment. This can only be 
avoided by freely receiving into the trust, or mo- 

52 



THE ORGANIZATION OF INDUSTRY 

nopoly, all new capital on equal terms, thus 
making of these institutions general agencies of 
industrial control, and dissociating them with 
any idea of favoritism to a few. Unless this is 
done the sensitiveness of the public with regard to 
the exercise of monopoly power may be expected 
to increase. But along these lines the problem of 
the world market can be solved by nothing less 
than a world monopoly. 

It is possible to effect a closer adjustment of the 
vital parts of the industrial mechanism by the 
elimination of unnecessary middlemen. This will 
bring the producer and consumer into more direct 
relations and will facilitate mutual adjustments. 
The concentration of wholesaHng, jobbing, and 
retailing in large houses would promote stability, 
because small and local fluctuations are, in the 
hands of large concerns, made to neutralize one 
another. 

Stock exchanges and boards of trade and ex- 
changes of a similar character for specific lines 
of trade may render exceedingly valuable service 
by subjecting certain kinds of property to a pro- 
cess of continual valuation. Through these valua- 
tions there is expressed the conclusions of the 
combined wisdom of the investing public as to 
the position and prospects of any business, or the 
wisdom of any policy known to be adopted by its 
managers. The high character of the social ser- 
vice which such investors' organizations may per- 
form should promote an ambition leading to a 

53 



ECONOMIC CRISES 

jealous exclusion of all practices likely to further 
spurious or unwise investments. 

Likewise to further the bringing of industry to 
an intelligent knowledge of itself, all organizations 
such as commercial agencies for the collection of 
information are to be encouraged. It is of the 
utmost importance that this information should 
be handled in the most honorable and unpreju- 
diced manner. More trade papers are needed and 
more editors with training in economics. The 
public should be educated to appreciate statistics 
of production, of producing capacity, of visible 
supply, commerce, price, etc., and to demand care- 
fully prepared market letters as a part of general 
news. In the collection of commercial statistics 
the cooperation of the state with private industry 
may be most valuable. The state, because of its 
extent and coercive power, can collect much infor- 
mation regarding both external and internal trade 
not otherwise obtainable. For the same reason 
that the work of the Signal Service of the Weather 
Bureau is commended, it is desirable that there 
should be established a competent commercial sig- 
nal service."^ By the use of this information it will 
be possible to express with definiteness what is 
meant by average and normal conditions and, 
perhaps, also to define, and detect at an early 
date in their appearance, the practices and con- 

■^ See E. de Laveleye, " La Marche Monetaire et ses crises 
depuis cinquante Ans," Ch. I, pp. 7, 8; Thun, " Die Industrie am 
Niederrhein," Bd. I, p. 140 ff. 

54 



THE ORGANIZATION OF INDUSTRY 

ditions which lead to a crisis. It is possible that 
an extension of insurance might be made to serve 
as the basis for the better organization of produc- 
tive forces. Any proposed scheme for the insur- 
ance of business profits ^ will, however, necessarily 
meet the same sort of difficulties that beset insur- 
ance against the loss of work. Distress such as 
that through which the United States has recently 
passed may well encourage the formation of reserve 
funds in public as well as private treasuries to serve 
as a sort of informal insurance against times of 
crisis. The lines of insurance which are already 
organized on business principles have in their 
records accumulated valuable information concern- 
ing economic laws. More of this kind of informa- 
tion is sorely needed. It would seem as if a more 
liberal policy in regard to expenditures designed 
to establish and preserve prosperity might be fol- 
lowed quite generally by business enterprises, and 
a greater publicity be given to valuable business 



s Wachtel, the author of a work entitled, " Die Versicherung 
der Actienrente," has proposed a plan for the universal insurance 
of business profits, which he believes will prevent crises. For 
those businesses in which it is possible to calculate an average 
return upon invested capital, he would establish by law a certain 
minimum of dividends which must be paid within certain periods, 
— say of ten years each. The concern doing business at a loss or 
at small profit would be forced out of existence, and great care 
would be taken in the establishment of new business. The risk 
for those concerns willing to guarantee minimum dividends would 
be assumed by insurance companies voluntarily formed for that 
purpose. 

55 



ECONOMIC CRISES 

records. But if private enterprise cannot be en- 
listed in securing and disseminating the informa- 
tion which is needed to keep business in proper 
proportions, the state must be called upon to 
undertake the duty. 



RESUME 

I. One cause of crises is the lack of organs of industrial 
control to properly coordinate production 
with consumption. 
II. Statement of the problem. 

A. Certain changes have been brought about by 

modern industrial evolution. 

{a) Division of labor causes territorial speciali- 
zation. 

(b) Large masses of capital call for continuous 
exploitation. 
t/V (0 Time required for a complete economic 

process lengthened. 

(</) Specialization making oversight of the mar- 
ket difficult. 

(e) The widened market is subject to disturb- 
ance from many causes. 

(/) Freedom and individuality of buyer makes 
demand uncertain, custom weakened. 

(^) Development of wholesale and retail agen- 
cies hides producers and consumers from 
one another. 

B. The corresponding evolution of means of control 

which should have taken place has been 
retarded by the competition of private 
interests. 
(a) Ability and knowledge are reserved for pri- 
vate use. 

S6 



THE ORGANIZATION OF INDUSTRY 

((5) Production is for gain only. 
(^) The solution of economic problems is not 
* provided for by a system based on com- 

petition. 
(^) The lack of cooperation which causes the 
crisis makes industry resemble a mob. 
C. Result, (i) The market has grown more rapidly 
than individual business units have in- 
creased in size. (2) Business units have 
increased in productive power more than 
in ability to judge the market. 
III. Remedies. 

1. Monopoly. 

{a) Competition when coupled with large capital 
which demands continuous exploitation 
and elaborate plans and a chosen body 
of workmen not to be abandoned leads 
toward monopoly. 

{b) This movement objectionable unless owner- 
ship and management are severed more 
than at present so that large capitalistic 
organizations become managerial agencies 
for small stockholders rather than agencies 
for promoting the interests of a few. 

2. Elimination of middlemen. 

3. Increase of organizations of control and for spread- 

ing information such as stock exchanges, 
boards of trade, commercial agencies, and 
trade papers. Demand for better official 
and private statistics. 



57 



CHAPTER IV 

CRISES AND THE PROBLEM OF CAPITAL 

The nineteenth century is one which has wit- 
nessed an unparalleled development of the material 
equipment used to assist man in the production of 
wealth. It is necessary, therefore, in searching 
for the cause of crises, to examine into the relation 
between the accumulation and use of capital. 

Considerable attention has been devoted, by 
EngHsh writers on political economy, to certain 
tendencies at work in a progressive community, to 
change the proportion in which the three factors, 
land, labor, and capital, unite in production. The 
effect of the '* Industrial Revolution " has been to 
vastly increase the amount of capital which can be 
combined with a given amount of labor and land. 
Profits or the returns on capital are fixed by 
the relation of demand and supply. It has been 
long observed that in certain progressive countries 
the rate of profit continually tends to decline. 
Adam Smith ^ believed that the desires leading to 
the accumulation of capital, and the competition 
of capitalists among themselves to find employ- 
ment for their means, were suiHcient causes to 

1 « Wealth of Nations," Bk. II, Ch. IV. 
53 



THE PROBLEM OF CAPITAL 

account for the decline of profits. To this expla- 
nation a very important addition was made by 
Ricardo. To understand what this was, it will 
be necessary to refer to the law of diminishing 
returns. 

The price of food was exorbitantly high in Eng- 
land at the opening of the nineteenth century. 
Among the causes of this were the war with 
France, a succession of bad harvests, and the dis- 
turbed condition of EngHsh agricultural labor. 
But the primary cause was that the population of 
England was increasing beyond what the agricul- 
tural resources of the country could support. 
These conditions attracted the attention of thinkers 
to the agricultural industry. The law was formu- 
lated that when the quantity of labor and capital 
applied to a piece of land is increased by a given 
amount, the returns yielded by the land will be 
increased in a less than proportional degree. The 
best lands are naturally first brought under culti- 
vation. If, then, the increase of population re- 
quires that poorer land shall be cultivated, the 
application of labor and capital to this inferior 
land will result in a smaller product than that 
received from a similar expenditure upon the best 
land. Thus the law of diminishing returns is held 
to characterize the cultivation of the soil. 

Ricardo pointed out that if, as population in- 
creased, it was necessary to take inferior sorts of 
land into cultivation, the cost of producing the mini- 
mum supply of food upon which the wage-earner 

59 



ECONOMIC CRISES 

could subsist would increase ; under the condition, 
therefore, that the population is increasing, wages 
must form an increasing factor in the cost of pro- 
duction and profits must fall. 

This explanation of declining profits superseded 
that of Adam Smith. It was as a corollary of the 
law of diminishing returns in agriculture that the 
tendency of profits to a minimum was at this time 
discussed. The former law was given an emphasis 
which corresponded with the pessimistic view 
taken by economists of the future of England's 
industries. A shadow was cast by it over the 
economic discussions of the period. The thing 
that they could not overlook was that the land 
of England was very limited in quantity. The 
idea of a possibility of increasing the product of 
the soil by improving the methods of cultivation 
was swept aside as a temporary expedient. The 
exhaustless field for the employment of capital pre- 
sented by foreign trade was hardly as yet realized. 
The tendency of profits to a minimum was dis- 
cussed by Wakefield and Chalmers,^ but the theory 
was developed and brought into definite connec- 
tion with the subject of crises by John Stuart 
Mill.3 

2 Dr. Chalmers was strangely confused as to the difference 
between the balancing of the factors in production and the bal- 
ancing of the forces governing production and consumption. See 
" Political Economy and the Moral State and Prospects of Soci- 
ety," pp. 105, 106, and pp. 157, 158. 

3 " Principles of PoUtical Economy," Bk. I, Chs. IV, V, VI, 
XI; Bk. II, Ch. XV; Bk. IV, Chs. Ill, IV, V, VI. 

60 



THE PROBLEM OF CAPITAL 

The theory as perfected by this writer is as 
follows : Profits depend upon the disposition to 
save and the field of employment open for capital. 
It is pointed out that the tendencies leading to the 
accumulation of capital are strong in England. 
The opportunities which are open for the employ- 
ment of capital are constantly on the verge of 
being entirely occupied ; however, from time to 
time events take place which create new openings. 
There exists a boundary of profitable investment 
which is frequently in plain sight, but which is 
from time to time being expanded by unforeseen 
occurrences such as the perfecting of inventions 
and improvements of one sort or another. The 
application of capital to the cheapening of the 
necessaries of life by means of which wages may 
be reduced affords a means of increasing profits. 
The opening of foreign trade provides an outlet 
for capital, and relieves the pressure of competing 
capital, which would otherwise quickly reduce 
profits to a minimum in a country so small and so 
frugal as England. Should these means for a 
time fail, profits would soon fall to such a point 
that they would merely induce the saving neces- 
sary to keep intact the capital then in existence. 
Industry will then have reached the " stationary 
state." 

While the influences which expand the market 
are occasional, the tendencies which promote the 
growth of capital are continuous. There are, 
therefore, frequently considerable periods of time 

6i 



ECONOMIC CRISES 

when capital is growing more plentiful and profits 
are falling. But a decline in profits is unwelcome, 
and is by no means endured with equanimity or 
without attempts at escape.* The search for new 
fields of investment in which capital may be made 
to yield large returns is stimulated by a general 
decline of profits. When the prevailing rate of 
profits is low, the capitalist is willing to make more 
daring ventures and run greater risks to secure 
large remuneration. The decline of profits stimu- 
lates speculation. The greater and more rapid 
this fall, the more reckless the ventures to which 
it will give rise. Railways are built in the hope 
that industries will grow up along their lines in 
the future, mines are opened in the hope of creat- 
ing valuable property, manufactories are con- 
structed depending upon contingent markets. Any 
new thing which promises relief is eagerly listened 
to. The period of speculation during which invest- 
ments are made is followed by a period of expec- 
tancy, which soon changes to distress as the results 
of rash investments become known.^ A break- 
down occurs, which spreads ruin through the 

* The truth of this is embodied in the well-known proverb, 
" John Bull can stand a good deal, but not two per cent." Illus- 
trations of absurd production are given by E. de Laveleye in 
" Revue des Deux Mondes," 1865, p. 210. 

^ The effect of misdirected investments is pointed out by Bonamy 
Price, "Contemporary Review," May, 1879. The dangers which 
beset a country rapidly increasing in wealth are noticed by Courcelle- 
Seneuil, "Journal des Economistes " (2d Series), Vol. XLIII, 
P- 34. 

62 



THE PROBLEM OF CAPITAL 

unsound structures of business, and the suspicion 
which is aroused tries to the utmost the soUdity of 
all enterprises. In the degree in which the com- 
petition of capital leads to rash investment it 
accomplishes the waste and destruction of capital. 
The capital tied up in unnecessary duplication of 
railways, unused mines, and superfluous factories 
does noc iiinister to the production of wealth, and, 
therefore, loses its character as capital or wealth. 
These losses relieve the pressure of the competi- 
tion of capital for investment. They throw away 
part of the savings of society, and they do not 
create new industries from which an annual saving 
can be made. In this expensive but automatic 
manner the fall of profits is checked. If specula- 
tion has been very intense and the loss of capital 
is great, the rate^ of profit may even be somewhat 
advanced above what it was when speculation 
began. The restoration of a satisfactory rate of 
profits removes the desire to embark in speculative 
enterprises.^ Business is, for a time, carried on in 
a normal and conservative manner. The higher 
rate of profits, however, affords a new impulse to 
the tendency to save. The increase of capital 
begins again. If the field for the legitimate in- 
vestment of these accumulations does not open as 

^ On the basis of this theory, it has been maintained that a 
privileged bank should not discount freely to keep down the 
rate of interest, since low rates of interest are what give rise to 
the speculative spirit. — Adolph Wagner, " Lehre von den Banken," 
pp. 233-237. 

63 



ECONOMIC CRISES 

rapidly as the capital is furnished, a condition of 
over-supply again results with consequent fall in 
profits and the rise of over-speculation which ends 
as before in crises and loss." Thus, there is estab- 
lished a cycle of influences which produces recur- 
rent periods of industrial distress. 

The writers before John Stuart Mill made very 
important the part which the losses of the crises 
played in relieving the competition of capital. It 
is indicative of a later phase of EngHsh industrial 
progress that Mill should have placed more em- 
phasis than did these writers upon the openings 
provided for capital by foreign trade and by inven- 
tions for reducing the cost of the necessaries of 
life. The older economists placed too much 
emphasis upon land as fixing the limit of capital 

■^ The testimony of economic history is by no means clear as 
to the connection between crises and periods of declining rates 
of interest. J. S. Mill mentions (Bk. I, Ch. XI, Sec. 3) that the 
rate of interest in Holland at the time of its prosperity was two 
per cent and three per cent. Certainly the crises that have visited 
Holland since that time cannot be attributed to the tendency of 
profits to a minimum. In the middle of this century, the common 
rate of interest paid in the English cotton industry for money was 
2^ per cent. (" Edinburgh Review," 1849, p. 429.) Tooke has given 
examples of speculation occurring at the time of a rise in interest, as 
in 1796 in provisions, in 1808 in general merchandise, and in 
1 814 in export articles. See " History of Prices," Vol. Ill, p. 159. 
On the other hand, the sudden reduction of interest upon the pub- 
lic debt of England is enumerated as one of the causes of the 
speculative excitement of 1825. Tooke, Ibid., Vol. II, p. 148 ff. 
Wagner considers a decline of profits important in connection 
with crises, op. cit., p. 530 ; so also does Roscher, " Grundlagen," 
Bd. I (21st Ed.), Sec. 188. 

64 



THE PROBLEM OF CAPITAL 

growth. They did not appreciate the world of 
new investments which the appHcation of inven- 
tion to the means of ocean transportation might be 
made to open for EngHsh capital. The thing that 
was cramping and choking industry and rendering 
its savings useless was the lack of human genius 
and organizing power sufficient to open this new 
world. The economists then had much to say 
of the "niggardliness of nature," while we now 
think that progress depends chiefly upon the 
talent and virtue of man. 

Their mistake was one of emphasis. Land 
seemed the chief factor in the problem of progress, 
while wheat was exorbitantly high during the first 
years of this century. The problem has shown 
new aspects since that period. Since 1840 foreign 
trade has brought about the paradox that while 
the price of bread has been lowered, the wealth of 
England has been steadily increasing, and at the 
same time the value of EngHsh land and the acreage 
under cultivation have decreased. 

Having before us the theory which economic 
literature affords us on the relation between the 
accumulation of capital and economic crises, let us 
examine into the character of this relation a step 
further. It is a common assertion that the chief 
cause of the recent vast increase of the world's 
productive power is due to the use of capital. 
The meaning which is commonly conveyed by 
the phrase " the use of capital " is a narrow and 
technical one. It is common to think of the prob- 
F 65 



ECONOMIC CRISES 

lem of capital as merely the problem of how to 
equip a given industrial plant in such a way that it 
will yield as large a product as possible. It is 
true that the use of capital enables man to com- 
mand the forces of nature to assist in a specific 
act of production. But the success of man's activ- 
ity in ministering to his own material well-being 
depends upon something more than his capacity 
to produce plentifully certain kinds of goods. 
The problem raised by the crisis is broader than 
that of a given machine or factory or industry, 
and lies in the maintaining of proper relations 
between industries and men's wants. 

If the present employment of capital leads only 
to over-production along certain lines, it cannot be 
said that we are completely equal to the task of 
using capital. There must be ability to organize 
and properly coordinate the forces of production 
and to distribute their activity evenly over the 
entire field of production in which demand will 
sanction their use, before it can be said that we 
have in a broad sense mastered the problem of the 
use of capital. To be able, in the broadest sense, 
to "use capital" implies not only the power to 
employ it successfully in bringing into existence 
this or that good, but also the power to so organize 
the system of industry and so develop the wants 
of society as to accommodate and turn, without 
friction or waste, this increased productive power 
to the service of man. 

The literature devoted to crises and the common 
66 



THE PROBLEM OF CAPITAL 

testimony of business men leave no doubt but 
that production often runs unduly ahead of con- 
sumption, and that the markets of certain regions 
are frequently in a state of glut with reference to 
certain commodities. These are partial gluts, but 
in the period of greatest stringency in the climax 
of a crisis there is often such a general and exces- 
sive cautionary restriction of consumption as to 
produce temporarily an almost universal glut.^ A 
failure to adjust production to consumption which 
results in a partial glut, with consequent demoraliza- 
tion and loss in certain lines of industry, may in a 
credit economy easily precipitate a general rupture 
of the equilibrium of trade. If the machinery of 
credit is so far weakened at any point, by a partial 
glut, as to awaken general suspicion as to the 
soundness of that machinery, the suspicion may 
give rise to such a demand for liquidation as will 
precipitate a general crisis. A crisis naturally 
promotes general economy in consumption. The 
result of this may be that the pressure to convert 
stocks of goods into cash in the face of a failing 
market will result in a temporary but very general 
overstocking of markets ^ and a diminution of every 

^ Commodities that can serve as money being excepted. For 
a discussion of the effect of a sudden reduction in consumption, 
see Sismondi, "Nouveau Principes d'Economie Politique," Livre 
II, Ch. Ill, pp. 82, 83, and William Smart, " Contemporary Re- 
view," May, 1888, p. 691. 

^ During a crisis, a glut may extend to products that have not 
been produced in excess of what the normal demand would war- 
rant. — Hobson, "Evolution of Modern Capitalism," Ch. VII, Sec. i, 

67 



ECONOMIC CRISES 

effective demand except that for the more cumber- 
some medium of exchange suddenly demanded to 
take the place of credit. 

This condition has been variously called one of 
over-production and one of under-consumption. 
The latter of these two designations is preferable, 
as the initiative in the general change is most fre- 
quently taken by demand. The supply cannot be 
immediately altered to accommodate this change. 
The trouble is, however, obviously a lack of 
adjustment between the forces governing demand 
and supply. Any step which can be taken to 
improve this adjustment and set up a regulative 
and connective machinery will be a step in the 
right direction. Crises present evidences of gen- 
eral distress for which a general cause has quite 
naturally been sought. By confining study to the 
period of panic it is easy to believe, from the 
temporary conditions prevailing, that the cause 
of distress is general over-production. But such 
an explanation is not true. Disproportion in pro- 
duction may precipitate a crisis; the consequent 
distress is general, not because over-production has 
been general, but because the loss suffered by one 
industry has destroyed credit which is a general 
bond of industrial society. 

A partial glut, which is to be distinguished from 

pp. 167, 168. J. S. Mill maintained that there might be a 
general excess of products, not because of over-production, but 
because of the effect of a lack of confidence. " Some Unsettled 
Questions of Political Economy^" Essay II. 

68 



THE PROBLEM OF CAPITAL 

the general glut of the panic period, is the evi- 
dence that the producing power of society has not 
been properly directed in the satisfaction of social 
needs. If the chief increase of the productive 
power of industry comes through the introduction of 
capital, gluts must be looked upon as evidence that 
capital has put us in possession of productive powers 
which we do not yet know how to utilize properly. 

The introduction of capital makes the act of 
production a more roundabout and long-continued 
one. The greater the amounts of capital employed, 
the more does the specialization of capital depend 
upon forecasts of the condition of the market at 
a relatively distant time. The lengthening of the 
period of time over which the act of production 
is extended increases the liability that before the 
good is completed the demand for it will have 
disappeared. 

A glut of commodities can be easily prevented 
or reduced by merely stopping the wheels of in- 
dustry. But the capital which has been specialized 
to produce those commodities, and the plans of 
operation that have been perfected, cannot be 
transferred to other sorts of productive activity 
without great loss. The misapplication of pro- 
ductive power which is revealed in the glut causes 
a loss in the unnecessary goods produced, in the 
sacrifice which attends the transfer to some other 
line of production, and in the distress which 
the failure of one branch of production may com- 
municate to the rest of economic society. 

69 



ECONOMIC CRISES 

The growth of industry does not take place with 
that perfection of constant readjustment of parts 
and functions which characterizes the growth of 
the true organism ; it is accompanied by suffering 
and uncertainty. Any increase in disposable capi- 
tal necessitates a readjustment of the factors of 
production to one another and brings up the gen- 
eral problem of the organization of industry in all 
its parts. As a producer of wealth man has three 
powers, the power to labor, to save, and to man- 
age. In order that industrial society shall be 
prosperous, these three powers must exist and be 
exercised in proper proportion. In the early 
stages of industry the first two appear most im- 
portant. Our economic life increasingly demands 
managerial ability. The manager must not only 
strive to increase production by improving the 
way in which land, labor, and capital are related 
to one another, but must correlate production and 
consumption not only by the proper distribution 
of productive power but if necessary by educating 
and stimulating consumption. 

The appUcation of the productive power, which 
comes from the use of capital, in such a way as 
to promote a well-balanced growth of industry is 
rendered difficult by the fact that equal amounts 
of capital devoted to different industries do not 
produce the same increase in product, inasmuch 
as there are businesses of increasing, constant, and 
diminishing returns. Capital is not as important 
a factor in some lines of production as in others. 

70 



THE PROBLEM OF CAPITAL 

Capital seeking investment is never distributed 
evenly to all branches of industry. Indeed, new 
capital is not permitted to compete with equal 
freedom in all parts of the economic field. Large 
aggregates of capital effectively organized for 
defensive purposes discourage small capitals from 
entering the lists against them. Just as public 
thought is seldom distributed with proper empha- 
sis, and as public interest unduly exploits a few 
topics upon which attention has been fixed, at the 
expense of other matters which are in need of 
more publicity than they receive, so industry bears 
the evidences that the productive powers of society 
are unduly concentrated along a few lines. Prog- 
ress seems largely made up of uneven starts and 
advances. Some sciences are for a time accorded 
veritable *' booms" and become "fads," while 
others, equally useful, are for a time relatively 
neglected. In consumption the refinement and 
precision of popular taste along some lines are by 
no means paralleled in other lines. So in the 
distribution of productive power the application 
of labor-saving devices has made much more rapid 
progress in some industries than in others. And 
production as a whole has been studied to the 
neglect of consumption, and of the means of or- 
ganization and control necessary to coordinate the 
two. 

When a market has been oversupplied, and 
prices have been unduly depressed, and with them 
profits, the wrong kind of virtue has often been 

n 



ECONOMIC CRISES 

invoked. It seems to many as if industry was 
like war. Anglo-Saxon pugnacity has been forti- 
fied by precepts exalting grit and staying power. 
The result is that industrial struggles are too com- 
mon, the object of which is not so much to dis- 
tribute properly productive power in industry, as to 
enlist all available capital and brains in an attempt 
to whip somebody else into bankruptcy. An 
escape from small profits has too often been be- 
lieved to exist only through securing the economies 
of production on a large scale. 

These are some of the circumstances which 
have led to unnecessary reduplication of plant, 
and an over-investment of capital, particularly in 
businesses of increasing returns. The extent of 
this can be judged in some cases by the number of 
establishments closed by trusts, which have main- 
tained the same product by operating a few plants 
to full capacity.^*^ The evils attending the misap- 

10 «* Even before the days of the Cotton Oil Trust, numerous 
presses and refineries had for a long time been inactive. The 
trust closed at once more than a dozen of the small old-fashioned 
mills. The same thing happened with the Sugar Trust, which 
can supply the whole market with the product of one-fourth of 
the plants it owns. The Whiskey Trust immediately closed sixty- 
eight of its eighty distilleries, and with the remaining twelve was 
enabled to furnish the same output as before, and soon to largely 
increase it," — E. von Halle, " Trusts or Industrial Combinations 
in the United States," p. 66. The manufacturers of hosiery at 
Chemnitz, Saxony, maintain that that city could easily turn out 
five times its present enormous product if the market would war- 
rant. Cons. Rep., September, 1897, p. 63. Mr. Simon Sterne is 
responsible for the assertion that " no railway, even when it is 

72 



THE PROBLEM OF CAPITAL 

plication of capital are manifestly increased by 
anything which increases the amount of wealth 
devoted to further production until a rational 
means of employing this wealth has been discov- 
ered. The unequal distribution of wealth gathers 
together the products of industry into the hands 
of a few in excess of what is needed for providing 
the necessaries and comforts of life, and creates a 
situation in which the conversion of a large part 
of the social dividend into capital is easy. Such 
accumulation is accompanied by little of the " ab- 
stinence " of which economists had formerly much 
to say. Large fortunes increase with truly appall- 
ing rapidity when kept long intact. Institutions 
which gather together small savings and facilitate 
their investment increase the amount of capital 
seeking employment. 

Wealth should not be devoted to production 
without a proper consideration of the demand 
upon which the intended production must depend. 
Saving should always be properly coordinated with 
its final aim, consumption. ^^ To express the same 

most actively employed, is worked at anything more than a small 
percentage of its maximum capacity." — Address before National 
Board of Trade, New York City, 1878. It is notoriously true 
that the wholesale and retail trade of the country is on a scale 
fitted to render many times its present service. 

11 See Hearn, " Plutology," Ch. VII, Sec. 6. Sismondi, Lauder- 
dale, Malthus, and Chalmers all agree that capital can only be 
amassed with profit to a certain point. On the other hand, J. B. 
Say, James Mill, Ricardo, McCulloch, and Senior adopted the 
imperfect ideas of Adam Smith. See Robertson, "The Fallacy 
of Saving," p. 29. 

73 



ECONOMIC CRISES 

thing in another way, the economic mechanism 
will not run smoothly unless a proper proportion 
is maintained between final and productive con- 
sumption, that is, between the use of goods for 
human enjoyment, and their use to assist in pro- 
ducing other goods. A small productive consump- 
tion, by restricting the productivity of labor, compels 
a small final consumption. A large productive 
consumption, by increasing the productivity of 
labor, may render possible an increased accumu- 
lation of wealth, but it renders imperative an 
increased final consumption. Otherwise, consum- 
ers' goods will fail to return their values to their 
producers, and they and the specialized capital 
necessary to produce them will be degraded in 
worth. The future, as such, never comes. The 
habit of preferring the future may become so fixed 
as to crowd out the very realizations for which it 
was established, and in connection with which it 
is alone reasonable. The increased consumption 
which is made possible by saving can only be 
realized in contention with the habit formed to 
provide the means for its realization. 

We have long enough been saying, " If we can 
only produce enough, consumption will take care 
of itself." Nothing will take care of itself. The 
mistake has been analogous to that fanatical doc- 
trine which counselled its followers to look after 
the interests of a future life, and leave those of 
this life to take care of themselves. 

Relief from the problem of applying capital to 
74 



THE PROBLEM OF CAPITAL 

production is, of course, temporarily afforded by 
the destruction of capital. John Stuart Mill, as 
we have already seen, emphasized the relief which 
is afforded by the losses suffered during a crisis. 
Such a remedy is too heroic and too temporary in 
character to command our attention. So also the 
extravagant use of wealth may afford a relief,^^ but 
through a remedy as bad as the disease. Many 
who admit the relief which results from a loss of 
capital are not willing to admit the relief which 
results from luxurious expenditure. Such persons 
probably hold their opinion because they look upon 
luxury as wasteful and anti-social. But so is the 
loss of capital suffered in crises wasteful and anti- 
social. These losses are no more a real relief for 
industry than blood-letting is a universal panacea 
for the ills of the human body. 

The only permanent relief is to be found in 
developing, somehow, new and intelligent uses for 
wealth as rapidly as wealth shall be accumulated. 
Production must be regulated with reference to 
demand; yet a gradual increase in any sort of 
production may develop its own market within 
certain limits. In like manner it is necessary that 
the supply of the three factors of production should 
stand in some relation to the usual method in which 
they are combined ; yet a gradual increase of any 
one factor may be accommodated by an alteration 
in the methods of production. The invention of 
machinery and the elaboration of manufacturing 

^ Chalmers, pp. 124-132. 

75 



ECONOMIC CRISES 

processes afford new openings for capital by in- 
creasing the proportion in which it may be com- 
bined with the other factors of production. The 
question is, Will the application of these forces to 
the production of new classes of utilities and will 
the education and expansion of human wants take 
place as rapidly as the productive power of man 
increases ? 

To accommodate an increase of production, un- 
less we are to be satisfied with the temporary relief 
of stocking frontier markets, and exploiting the 
needs of primitive peoples, there must be a change 
in demand, new wants being developed, and great 
emphasis being placed upon those intellectual and 
spiritual needs which are capable of indefinite 
increase.^^ The development of man's power over 
nature must be accompanied by a study of the 
manner in which this power can be made to con- 
tribute to the development of man's higher nature, 
and by a determination to use it for that purpose. 

^3 In regard to the plethora of products, Mr. John M. Robert- 
son says: "The real cure, as regards the labour-market, would 
be by way of extension of demand to objects not readily produced 
in excess; such as superior hand-made goods and products of 
art of all kinds. Here a glut is impossible ... It is not quan- 
tity, but kind, of consumption, the setting up a continuous 
demand which shall withdraw labour from the fatally easy frui- 
tions of the mechanical manufacture of common necessaries, that 
will prevent chronic depression of trade." — " The Fallacy of 
Saving," pp. 113, 114. Cf. Sir Lyon Playfair, "Contemporary Re- 
view," March, 1888; David A. Wells, "Contemporary Review," 
July, 1887 ; Carroll D. Wright, in " Report on Industrial Depres- 
sions," Washington, 1886, pp. 80-90. 

76 



THE PROBLEM OF CAPITAL 

Unless these larger problems of the economic life 
are heeded, it is quite possible that the increase of 
social capital may outrun the development of social 
wants and the provisions made for the use of cap- 
ital, because of poverty of resource, just as a private 
income may overtax the ability of its possessor to 
consume it intelligently.^* 

As the rare social virtues are highly rewarded 
by social esteem, so the rare economic virtues are 
highly rewarded in economic returns. If the 
three economic powers of man, to labor, to save, 
and to manage, are not properly proportioned, the 
most scarce of these powers will receive a high 
reward at the expense of the other two. The 
human race by laboring and saving has been shift- 
ing its burdens upon nature through the employ- 
ment of capital, but its mastery over nature 
requires the talent of management in an increas- 
ing degree. 

When parsimony is rare it is highly paid in the 
return given to capital ; when it becomes common 
its rewards are reduced. The methods by which 
the individual advances his fortunes above those 
around him, must not be confused with the meth- 
ods by which the economic life of society is prop- 
erly regulated. Maxims of private wealth-getting 
cannot be transformed directly into principles of 

1* See J. S. Mill, " Principles of Political Economy," Bk. I, Ch. 
XI, Sec. 4. Mill says to be wealthy is for one to have a large stock 
of useful articles (" which he can use," adds Mr. Ruskin, " Unto This 
Last." — Essay IV). 

77 



ECONOMIC CRISES 

political economy.^^ If capital is accumulated more 
rapidly than the field for its use is developed, the 
talents of the organizer are those demanded and 
a high remuneration will be given for organizing 
ability rather than for saving.^^ The liberal salaries 

IS Smith was in error on this point. Bk. IV, Ch. II. See 
Mummery and Hobson, "The Physiology of Industry," p. io6 ; 
also Mill, Bk. I, Ch. V, Sec. 3. Dr. Chalmers recognized this dis- 
tinction in the following way : " This question turns precisely on 
the balance between two appetites of his (the capitalist's) nature 
— between the appetite for eventual gain and the appetite for 
present comfort. Should the latter prevail, and prevail generally^ 
capital would be kept down and profit be sustained. Should the 
former prevail, and also prevail generally, capital would be aug- 
mented and profit be depressed. It does not affect this conclu- 
sion, that the highway of fortune, on the part of the individual 
merchant, is to save as much and spend as Uttle of his revenue 
as he can. It is true of every single capitalist that he is all the 
richer by saving than spending ; and that under any given rate 
of profit, or with any given general habit on the part of capital- 
ists. But it is not true that capitalists, collectively, will become 
richer by saving than by spending ; for on their general habit, 
the rate of profit immediately and essentially depends." — " Politi- 
cal Economy and the Moral State and Prospects of Society," p. 91. 
See also J. M. Robertson, op. cii., pp. 90-94. 

1^ Upon the plethora of capital and lack of employment, Will- 
iam Smart very pertinently says: "All labor in the present day 
waits, not on the capitalist — that is a socialist mistake — but on 
the entrepreneur, the organizer. . . . The fact seems to be that 
the world's progress is continually outrunning its organizing power. 
Production of anything is so great that a few manufacturers speedily 
supply all the demand for their goods, and then, instead of wait- 
ing for the articles to win their way and make a market, they 
double their production in order to cheapen it by a fraction and 
undersell their rivals ; they glut the market and then throw the 
worker on the street till things right themselves. All the time, 
the world is wanting and waiting for other things; when one 

78 



THE PROBLEM OF CAPITAL 

now paid to men of superior organizing power, in 
contrast with the low rates of interest prevailing 
upon the markets of the world, show the present 
relation between the supply and demand for these 
qualities so necessary to social progress. 

Capital, however, can be used to assist in the 
solution of its own problem. Wealth may be 
used in the encouragement of science and in- 
vention and in opening those lines of possible 
economic activity which are not generally appre- 
ciated. It may be used to promote the study of 
new markets, to disseminate information as to 
market conditions, and to perfect all those means 
of industrial control which would further a system- 
atic distribution of capital over the realm of indus- 
trial enterprise. But the most abundant return, 
measured in terms of public welfare, will prob- 
ably result from the application of capital to the 
development of the higher and more social eco- 
nomic needs of man. 

RESUME 

I. A crisis may be caused by the accumulation cf unused or 
improperly used capital. 

II. The existence of imused capital, indicated by decline of 

rate of profits. 

III. Review of English economic theory on the tendency of 

profits to a minimum. 
{a) Theory of Adam Smith. 

demand is supplied, if the same energy were turned on to supply 
another, there would be no over-production." — " The Dislocations 
of Industry," "Contemporary Review," May, 1888, Vol. LIU, 
pp. 695, 696. 

79 



ECONOMIC CRISES 

(p) Theory of Ricardo. The law of diminishing re- 
turns. Wages an increasing share in dis- 
tribution, profits a decreasing. 

(c) Theory of John Stuart Mill. A closed field of 
employment leads to falling profits and un- 
wise investments, causing crises. 

{d) The field of employment and land. Employ- 
ment and "use of capital." 
IV. The existence of improperly used capital is indicated by 
gluts. 

{a) The existence of gluts unquestioned, {b) A par- 
tial glut may cause a general glut, {c) A 
partial glut indicates an inadequate distri- 
bution of productive power. 
V. The existence of tinused and improperly used capital 

indicates a lack of managerial ability. 
VI. Remedies. 

{a) Distribution of capital in employment difficult. 
(i) Effect of capital in different industries. 
(2) Relation of capital to land and labor in 
different industries. (3) New capital barred 
out of certain fields. (4) Psychology of 
overdeveloped industries. (5) Industrial 
warfare and overinvestment. (6) Econ- 
omies of production on a large scale. 
(7) Plants closed by trusts. 

(b) Investment must be coordinated with final con- 

sumption. 

(c) Relief given by destruction of capital, buying 

luxuries, and supplying frontier markets. 

(^) New uses of wealth must be developed. 

{e) New and higher wants must be developed. 

{/) Private maxims of saving not principles of polit- 
ical economy. 

ii) Capital applied to solution of its own problem. 



80 



CHAPTER V 

CRISES AND THE WAGE SYSTEM 

In contrast with the previous study of crises, 
from the point of view of production, the present 
chapter deals with a source of industrial disorder 
which has its seat in the process of distribution. 
A theory of crises sometimes known as the " Wages 
Theory," has been developed, which directs atten- 
tion to the share of the products of industry re- 
ceived by labor. No one can, in these days of 
agitation and organization, remain ignorant of the 
fact that there is a labor problem and a problem of 
wages. The coincidence of the rise of crises with 
the inauguration of those general conditions which 
have distinguished the modern form of the wage- 
earner's problem, has served to make the crisis 
argument a convenient handle in many discus- 
sions concerning wages. 

The first writer to furnish a consistent theory 
of the relation between crises and the industrial 
problem generally was Rodbertus.^ That conserv- 

1 " A more deeply cutting criticism of the present economic 
order with private property in land and capital, than that penned 
by Rodbertus in ' Sociale Frage,' pp. 116-119, has not been 
brought forward by any English or French socialist, nor yet by 

G 81 



ECONOMIC CRISES 

ative German jurist, early in his writing,^ furnished 
a most penetrating, though not entirely new criti- 
cism ^ of industry, which aimed to explain the 
economic causes of poverty as well as the recur- 
rent spasms of crises.* 

Rodbertus assumed, without attempting proof, 
that all those goods which demand serious eco- 
nomic consideration may be looked upon as prac- 
tically the product of labor alone. They are 
valued solely as the products of labor. This being 
true, he held that the ideal distribution of prod- 
ucts is such as will give to each laborer goods 
exactly equal in value to the product of his labor, 
excepting only a reserve necessary to keep capital 
intact and to provide maintenance for those per- 
forming useful services for society, but who do not 
directly participate in production. Such a system 
of distribution is very far from being the present 
reality. Departure from this ideal does more in 
his opinion than violate principles of justice ; it 
violates fundamental economic laws, and entails 

Engels, Marx, or Lassalle." — A. Wagner, " Grundlegung," Bd. 
II, p. 332. Wagner has called Rodbertus his great and honored 
teacher. "Grundlegung," Bd. I, p. 748. 

2 The outlines of this system of thought appear in his first 
important work, published in 1842, entitled, "Zur Erkenntniss 
unserer Staatswirthschaftlichen Zustande." 

* See especially Anton Menger, " Das Recht auf den vollen 
Arbeitsertrag in Geschichtlicher Darstellung," 2 Aufl., Stuttgart, 
1 891, Sec. 8. 

*"Kapitar' (Wagner-Kozak Ed.), p. 61. The connection 
between crises and pauperism is not emphasized in Rodbertus* 
earliest writings, but is dwelt upon later. 

82 



THE WAGE SYSTEM 

upon society a considerable part of the misery it 
endures. From time to time the present erro- 
neous principle of distribution brings industry to a 
standstill in the crisis. To point out the manner 
in which this takes place, Rodbertus prepared the 
following analysis of the present capitalistic wage 
system. 

The productive pov/er of labor is to be estimated 
by the total annual product of goods. That the 
productivity of labor is increasing is evidenced by 
the increasing amounts of goods produced each 
year. The development of the mechanical arts 
and the better organization of labor serve to in- 
crease the product resulting from each unit of 
labor. It is since the time when the inventions of 
Watt, Fulton, Crompton, and Arkwright became 
effective in multiplying the productive power of 
labor that crises have been prominent.^ 

Rodbertus asserts that in modern society the 
condition of the wage-earning class is not deter- 
mined by the productivity of its labor. He who 
sells his toil can find employment only after he 
has complied with the exigencies of the present 
industrial system. This system is erected upon 
the basis of private property in the instruments of 
production. In order that the laborer may be 
supplied with these necessary instruments, or to 
put it plainly, that he may escape destitution, he 
must compete for employment. The capitalist 
alone has the power of initiative in production by 

^ " Hypothekennot," p. 217. 

83 



ECONOMIC CRISES 

reason of his property rights in capital. He 
chooses to pay for labor, not according to its pro- 
ductivity, but according to the terms set by demand 
and supply. The supply of labor will in the long 
run increase, if the wages obtained are more than 
sufficient to provide what is looked upon by the 
laborer as the necessaries of life. If wages are 
less, the supply of labor will diminish. Thus the 
contest upon the market develops the " iron law " 
that wages tend to remain at the lowest point at 
which a sufficient supply of labor can be secured.^ 
Labor is sold for the cost of production. The 
standard of life which determines the acts of the 
laborer with reference to the future supply of 
labor is capable of change, but its elevation is 
difficult. 

The difference between the amount paid for 
labor and the product of labor is a surplus taken 
by the capitalist. It is an historical fact, asserts 
Rodbertus, that the productivity of labor has in- 
creased more rapidly than have wages. Thus 
wages become a relatively decreasing share in dis- 
tribution, and an increasing surplus falls into the 
hands of the capitalist. According to the analysis 
of Rodbertus there are but two shares in produc- 
tion : one is wages with which labor is paid but 
not paid for ; the other share includes all income 
obtained through the force of the right of private 
property and without appreciable personal exer- 
tion. This includes interest, rent in the ordinary 

« Rodbertus, " Kleine Schriften," p. 223. 
84 



THE WAGE SYSTEM 

sense, and profits. It is collectively designated by 
Rodbertus as "rent." That such a share as this 
exists is due, in the first place, to the existence of 
a surplus product of labor above what is necessary 
to sustain the laborer and, in the second place, to 
the institution of private property which gives to 
a few the power to seize this surplus.'^ Rent then 
is, in plain language, robbery. The blame for the 
existing condition of things cannot of course be 
placed upon the shoulders of any individual or 
class.^ It is the legitimate product of the present 
social and industrial system which has been pro- 
duced by general social forces and which can be 
modified only by a gradual process of evolution. 

This reasoning is used by Rodbertus to account 
for the growing disparity of wealth between the 
capitalistic and the wage-earning classes and the 
sharpening social contrasts which attend this 
divergence. 

The accumulation of a surplus of wealth in the 
hands of the capitalist, which is increased by every 
increase in the productive power of industry, is a 
process which obviously cannot continue indefi- 
nitely. The sale of the products of industry 
depends chiefly upon the purchases of persons 
other than capitaHsts. The use of capital increases 
the use of machinery and the importance of the 
so-called machine industries. The assertion, which 

"^ " Kapital," p. 202. 

® " Kein Einzelner ist anzuklagen," " Zur Beleuchtung " (Wag- 
ner-Kozak Ed.), p. 185. 

85 



ECONOMIC CRISES 

is made on good authority, is therefore significant, 
that eighty per cent, of the machine-made goods 
of the world are consumed by the laboring class. 
The cutting off of the laborer's share in distribu- 
tion manifestly in an equal degree diminishes his 
power to consume or to take the products of 
industry off the hands of the producer. 

The surplus which private property enables the 
capitalist to retain is not distributed in such a way 
as to prevent the final clogging of industry. 
Rodbertus denied that the capitalists had either 
the desire or the ability so to consume this surplus 
as to prevent it from stopping the wheels of indus- 
try. It seems clear that if this surplus were spent 
in unproductive consumption it could not be 
accountable for the plethora of unsalable prod- 
ucts found in a crisis.^ The capitalist is stimulated 
by rivalries within his class to accumulate his 
wealth. The income which he receives is largely 
reinvested as capital to earn a further dividend. 
It results in an increased production. With these 
surpluses new mines are opened, new lands 
cleared, and new industries equipped with 
machinery. 

A most important effect of improvements in 
industry is to decrease the expense of providing 
the minimum of the necessaries and comforts of 

s During the hard times of 1893, a meeting of women workers 
was held in New York City, at which the question was asked 
what word should be sent to the women of the wealthy classes. 
The answer was, "Tell them not to cut off their luxuries." 

86 



THE WAGE SYSTEM 

life with which the wage-earning class may be 
induced to propagate. 

The increased power of production resulting 
from the investment of the economic surplus does 
not necessarily meet with a corresponding expan- 
sion of markets. The problem of disposing of 
an economic surplus is not solved by investing it 
in the means of further production. Rodbertus 
specifically asserted that speculation had nothing 
to do with this unwarranted increase of produc- 
tion.i<^ 

When the period arrives in which investments 
are many of them proving unsuccessful and 
profits are everywhere curtailed, it is most natural 
to practise retrenchment. The capitalist reduces 
general expenses, postpones repairs, and reduces 
wages. By this process of retrenchment the buy- 
ing power of the masses is reduced. As the mar- 

^^ Rodbertus says of speculation : " The part which speculation 
plays is not worth mention. That is solely a local or temporary 
misadjustment of the market, caused either by sending goods 
to a wrong market or by holding them until an unsuitable time. 
Such misadjustments are always partial, and do not in the slight- 
est resemble the general breakdown of the market resulting from 
commercial crises. The source of the evil comes in connection 
with production, not speculation." — "Zur Beleuchtung," p. 185. 
See also p. 227. Hertzka, a follower of Rodbertus, agrees in 
ignoring speculation : " Now is shown also the remarkable regu- 
larity of the recurrence of these catastrophies, which have no 
connection with fraud and over speculation, but which are noth- 
ing less than the indispensable consequence of each increase in 
production in a society, the economic system of which prevents 
any enlargement of consumption beyond certain relatively narrow 
boundaries." — "Die Gesetze der sozialen Entwickelung," p. 106. 

87 



ECONOMIC CRISES 

ket becomes less capable of accommodating the 
products thrown upon it, a further reduction of 
profits is unavoidable. In this manner industry is 
seized by a vicious circle of influences which sup- 
port and strengthen one another automatically. 
In order that industry may be prosperous, that 
which is produced must be marketed at profitable 
rates. The accumulation of a surplus implies a 
curtailment of the market. The attempt to 
employ this surplus productively calls for an 
expanding market, and if this is not found the 
profits of capital invested in production fall. So 
long as the capitalist attempts to prevent this fall 
of profits by reducing wages, he reduces the 
demand for his own products and tightens the 
noose which strangles industry. Like the backing 
horse with the lines wound around the hub, every 
movement to comply with the apparent demands 
of the situation only tightens the pressure. 

A lessening dividend on capital not only gives 
rise to the curtailment of various expenses, but it 
enlarges and stimulates production, the principle 
being to secure the economies of production on a 
large scale. With one hand the buying power of 
the market is curtailed, with the other, quantities 
of goods are thrown upon it. In the last stages of 
this "steeplechase of industry " colossal quantities 
of goods are thrown upon the rapidly failing mar- 
ket because the relation between failing consump- 
tion and a defective system of distribution is not 
seen, or if seen is recognized as beyond the power 

88 



THE WAGE SYSTEM 

of any individual to rectify. Over-production is 
the result. This leads to widespread failures and 
insolvencies and finally to the abandonment or 
destruction of vast amounts of capital with conse- 
quent unemployment and poverty. The explana- 
tion is said to lie in the relatively decreasing portion 
of the products of industry given to labor and the 
consequent cutting off of effective demand.^^ 

Many writers have analyzed the crisis in a simi- 
lar manner as due to the growth of the productive 
equipment of society too rapidly for its effective 
demand. As to the remedy for this condition, 
various opinions have been held. John Stuart 
Mill pointed out that the waste of invested capital, 
caused by rash ventures in search of profits, 

11 Theo. Hertzka thus presents the theory : " The exploitation 
of labor through profits and ground rents explains the con- 
trast between the productivity of human labor and the wages of 
labor, between the possible and the actual well-being of the 
masses. The most important cause of the lack of an abundant 
possible consumption for all lies in the misadjustment of pro- 
ductivity and production, i.e. potential and actual consumption. 
Much less is produced than the productive power of society 
would indicate, because production must regulate itself according 
to demand, and this is held within narrow boundaries by the 
exploitation, which limits the masses to bare necessities of life. 
The consumption of luxuries by the propertied classes can absorb 
only a small portion of the goods possible to produce in excess 
of what is required for the existence minimum of the masses. 
Also the demand connected with investment is fixed within given 
bounds by the range and character of production. Every attempt 
to expand production beyond the demand for the purposes of 
consumption or investment leads to over-production and crises." — 
" Die Gesetze der sozialen Entwickelung." 

89 



ECONOMIC CRISES 

brought relief. Chalmers, Sismondi, and Robert 
Owen suggested that less be saved and that more 
be expended, if need be, in luxuries. ^^ Rodbertus 
calls for a division of the growing surplus among 
the wage-earners, trusting that it will be expended 
properly by them. 

As to the remedial measures which may be 
taken to correct these tendencies of the present 
industrial order, Rodbertus was very conservative. 
His analysis classed him among the socialists, but he 

12 Very nearly the same idea occurs in Malthus, " Principles of Pop- 
ulation," Bk. I, Ch. V, Sec. II, p. 316 (7th Ed.). See also Bowen, 
"Principles of Political Economy," Ch. XVII, p. 267. U. H. 
Crocker, in the work entitled, " Excessive Saving a Cause of Com- 
mercial Distress," p. 13, says: "Let the economist point out, if he 
can, how the idle thousands can to-day be employed in producing 
* wealth ' except through such uneconomical measures as the crea- 
tion of new comforts and new luxuries for those who are able to 
pay for them." Herkner states the effect of oversaving as follows : 
" As a rule, the portion of the social dividend devoted to capitali- 
zation exceeds considerably the needs of industry for capital. While 
new investments create a demand for labor, and in so far add to 
the number of consumers with purchasing power, yet this purchas- 
ing power does not equal the increase of goods which is brought 
about by the new investment. Should the purchasing power of 
the newly employed laborers equal the net value of the product 
of the new undertaking, there would be neither interest nor profit 
for the capitalist and undertaker. Precisely here is the point 
when they have not the intention to consume interest, rent, and 
profits. If no corresponding increase of effective demand accom- 
panies the increase of goods caused by the new capital investment, 
the circumstance that a class of people year after year devote large 
sums to the increase of production, reserving it from consumption, 
leads soon, in an isolated economic society, to a disturbance of 
the balance between production and consumption." — Conrad's 
" Handworterbuch," Bd. IV, p. 897. 

90 



THE WAGE SYSTEM 

refused to ally himself with them. He believed, 
however, that the evils of the present were due to a 
laissez-faire policy which has left the problem of 
distribution to work itself out undirected by an 
intelligent exercise of public thought.^^ 

The need may sometime arise for interference 
on the part of the state, but any fundamental 
change must be slowly made. Because of the 
educating and conserving effect of the institution 
of private property, Rodbertus thought that prop- 
erty rights could only be very slowly curtailed.^* 
We may confidently believe, however, that we are 
in the midst of an evolution. Rodbertus thought 
as in the past the right of private property has 
been narrowed by extinguishing the right to own 
human beings, so in the future land and capital 
will be emancipated and ownership will remain in 
income alone. Ultimately industry must be regu- 
lated by a system whereby the total product of 
industry will be distributed to those creating it and 
no part of the product be permitted to accumulate 
and clog the industrial mechanism. 

i3«KapitaV'p. 6i. 

^* " Erklarung," etc., Bd. II, p. 303. Upon this point his last 
work, " Kapital," is more severe. The inconsistency of the posi- 
tions here assumed by Rodbertus has been pointed out by Anton 
Menger, " Das Recht auf den vollen Arbeitsertrag," Sec. 8. Cossa 
accounts for the confusion of Rodbertus' thought on the theory 
that he had always two schemes for reform in mind, — one for 
immediate and the other for ultimate realization. Rodbertus was 
not always clear in explaining which of these he had in mind. 
Cf. Cossa, "Introduction to the Study of Political Economy," 
p. 542. 

91 



ECONOMIC CRISES 

The most systematic manner of accomplishing 
this is through state control. The right of using 
property as capital being reserved exclusively for 
the state, and the organization and control of in- 
dustry resting entirely with the state, the manage- 
ment of economic affairs will be comparatively 
simple. Two fundamental estimates will be neces- 
sary. The first estimate will be of the value of 
the products of industry during a given period of 
time ; the second will be of the number of hours 
of labor necessary for their production. In esti- 
mating the number of labor-time units necessary 
to produce a given article, Rodbertus thought that 
the lowest grade of manual labor might be taken 
as the standard of measurement, higher sorts of 
labor being reckoned as multiples of the standard. 

In an industrial society so planned, the products 
of labor would be received into public storehouses. 
All labor expended in production would be paid 
in labor-time checks good for a certain value of 
goods at the storehouses. The use of money would 
be rendered unnecessary. If computations were 
accurate the value of all labor-time checks issued 
as wages during a given period ought to exactly 
equal in value all the products resulting from in- 
dustry during that period, less whatever goods it 
was deemed necessary to hold in reserve to replace 
capital, enlarge the productive equipment, support 
the quasi-productive members of society or defray 
the expenses of non-productive forms of activity 
demanded by public policy. This statement is 

92 



THE WAGE SYSTEM 

only true on the assumption that the values of 
goods equal their labor costs. Under such a 
regime an increase in the productivity of labor 
would mean either a greater abundance of goods 
for the laborer to consume or a release from labor 
by the shortening of the working day. 

As Rodbertus did not find it possible, in his 
thinking, to reduce all necessary professional and 
official services to measurement in terms of a unit 
of manual labor, he provided in his scheme for a 
tax which should support those rendering these 
services. 

The criticisms which suggest themselves in con- 
nection with this theory may be briefly enumer- 
ated.^^ In the first place goods are not valued ac- 
cording to the labor necessary for their production 
or reproduction.^^ This is not a disproof of Rod- 

1^ Some discussion of the difficulties which such a scheme as 
that of Rodbertus would meet in realization, is contained in " Rod- 
bertus' Socialism," E. B. Andrews, "Journal of Political Economy," 
December, 1892; "Scientific Socialism — Rodbertus," Osgood, 
"Political Science Quarterly," Vol. I, 1886, p. 560 ff.; Adler, 
" Studie iiber Rodbertus." 

A convenient presentation of the system can be found in Ru- 
dolph Meyer's " Der Emancipationskampf des Vierten Standes," 
Berlin, 1874-75 (Bd. I, 2 Aufl., 1882) ; Dr. R. T. Ely, " French and 
German Socialism in Modern Times," New York, 1883; ^.Iso in 
brief outline in H. M. Hyndman, "The Historical Basis of Social- 
ism in England," London, 1883; W. H. Dawson, "German Social- 
ism and Ferdinand Lassalle. " 

16 The consideration of the error of this assumption of Rodbertus 
is beyond the sphere of this discussion. It is best dealt with by 
Bohm-Bawerk in "Capital and Interest," Bk. VI, Chs. I and II; 

93 



ECONOMIC CRISES 

bertus' statement that an unequal distribution of 
the products of industry may be responsible for 
an increase in production not accompanied by a 
corresponding increase in final consumption able 
to precipitate a crisis. The idea that some uniform 
relation must exist between the productivity of 
labor and the rewards of labor in order that indus- 
trial distress may be avoided, is by no means 
an exclusive tenet of the followers of Rodbertus. 
Von Thuenen, in searching for a natural wage, 
attached great importance to a certain formula 
which to him represented justice. It was V^/. 
In this " a " represented the expenditure of the 
laborer for subsistence, and " p " the product of 

Cf. Karl Knies, "Geld und Kredit," Part II; H. Dietzel, "C. 
Rodbertus"; Adler, " Studie iiber Rodbertus." 

Cohn thus discusses the theory of value adopted by Rodbertus : 
" The same sophisms which appeared in the first presentation of 
his theory of value are retained to the last. They are something 
as follows : He passes by in silence the fact that Ricardo, in fol- 
lowing out Adam Smith's teachings, expressly declares that utility 
is the necessary premise of exchange value based on labor. He 
overlooks the fact that nature (material and force) is in an essen- 
tial degree limited relatively to the wants of man, — a principle 
which Ricardo strongly emphasized as regards land, the economic 
character of which is thereby explained; therefore, the coopera- 
tion of nature is not, as Rodbertus so often asserts, gratuitous, 
but is an element which must be taken account of in discussing 
the production of value. He is mistaken in regarding manual or 
•muscular' labor as a sole reason for 'costs,' and asserting in 
regard to the share which mind has in production that this is 
not *an outlay.'" — "A History of Politioal Economy." Supple- 
ment to Annals of American Academy of Political and Social 
Science, March, 1894, p. 87. 

94 



THE WAGE SYSTEM 

labor. The square root of the product of these 
two is the proper renumeration for labor. This 
formula proposes a constant relation between the 
productivity of labor and the rewards of labor. 

It may be denied, however, that any surplus, 
such as Rodbertus thought of, accumulates in the 
hands of the capitalist. If such a surplus be 
admitted it may be denied that the capitalistic 
class reinvests this surplus to such an extent as to 
overstock the market with the products of indus- 
try. ^^ These are questions of fact to be examined 
as such. 

Finally, if this theory of crises be admitted as 
sound, it may be pointed out that the socialistic 
scheme of production outlined by Rodbertus would 
not work justly, if indeed it could be made to work 
at all. It provides no means for considering the 
influence of any of the circumstances which de- 
termine marginal utility, excepting that of labor 
as an element of cost. Adequate recognition is 
not provided for services in themselves valuable 
but remotely connected with production. Foreign 

17 Mr. F. B. Hawley says: "The claim that production and 
investment are merely misdirected entirely ignores the existence 
of a class whose main object in life is not consumption but accu- 
mulation. Such a class will insist on investing a large portion of 
their incomes, and will not allow their consumption to exceed 
a certain percentage of the share of products that falls to them. 
This class certainly exists in a proportion inconsistent with the 
proper balance of society, and one cannot appeal to them with 
new wants." — "National Quarterly Review," October, 1879, p. 
282. 

95 



ECONOMIC CRISES 

trade would be rendered difficult and much of the 
enterprise due to private ambition would be ex- 
tinguished with the extinguishment of the right to 
use private property as capital. 

Rodbertus considered the standard of life rela- 
tively immobile and despaired of the success of 
any reforms aiming to bring about its elevation. 
The question may be asked therefore, Under a 
socialistic regime, if the productivity of labor was 
to increase and this was to result in a more ample 
return to each laborer, would not the ultimate 
effect of the law of population be to bring into 
existence a large population to live at a low stand- 
ard of life .-* Industrial progress under such con- 
ditions would mean an increase in the mass of 
low grade life. 

But if the standard of Hfe is not so incapable of 
improvement as is here represented, why cannot 
all movements for the elevation of the standard of 
life of the wage-earning class be indorsed as help- 
ing so to distribute wealth as to enlarge effective 
demand more rapidly than productive capital is 
invested, and to directly prevent crises.^^ Labor, 

18 Von Thiinen was among the first to adopt a broad view of 
the cost of producing labor. His position on education is thus 
shortly stated by Dawson: "Von Thiinen thinks that the only 
way to raise the wages of labor is to increase the cost of bringing 
up the laborer; and thus he advocates the better education and 
training of the workmen's children, the requisite cost being re- 
garded as an indispensable need. The laboring classes must 
learn that the remedy for their unfortunate condition lies largely 
with themselves, for it is at bottom a question of population." — 

96 



THE WAGE SYSTEM 

if paid a price equal only to the cost of production, 
is so paid because the laborer has set his price at 
this point. An elevation of the wage-earner's 
standard will distribute the surplus liable to injure 
trade into channels which will stimulate the buying 
market. 

No class in society has a right to call for eco- 
nomic rewards without the exercise of a reasonable 
amount of economic virtue. ^^ Only after it has 

"German Socialism and Ferdinand Lassalle," p. 42. Cf. J. H. 
von Thiinen, "Der isolirte Staat," Rostock, 1862, Bd. II, Ch. I, 
p. 37 ff. A short exposition of von Thiinen's position is contained 
in Roscher's " Geschichte der National-Oekonomik in Deutschland," 
Miinchen, 1874, Ch. XXXII, Sec. 183. 

Schippel looks to education to combat overpopulation. " Das 
Moderne Elend," p. 313. The pressure of the increase of popu- 
lation is considered by Alexander Everett, an American writer, as 
the origin of all progress. So also holds Schmoller, " Lectures on 
Theoretical Political Economy," Berlin, Summer Semester, 1894. 

1* The benefit features of labor organizations deserve favorable 
consideration for the effect which they have in enforcing upon a 
large scale a worthy standard of life. In the state of Indiana in 
1893, th^ d^^s paid by members of labor organizations amounted 
to 1 1.3 cents weekly. Ninety-six out of 212 organizations paid 
sick benefits, 125 out of 217 paid death benefits. With a total 
membership of 19,081, the amount of sick benefit paid was 
^8254, of death benefit, ^16,409. In commenting upon these 
figures, the chief of the Bureau of Statistics said: "The mem- 
bers of a vast majority of labor organizations tax themselves, that 
their families may not be a public charge in case of their death 
or disability, and in this regard expand to the full stature of good 
citizens. They make their orders life and accident institutions, 
of vast value to the state, because they relieve the state of 
burdens which in numerous instances would be imposed upon it 
for the care of widows and orphans." — Report of Bureau of 
Statistics, Indiana, 1893-94, pp. 118, 119. 
H 97 



ECONOMIC CRISES 

been shown that this virtue is systematically shorn 
of its rewards should appeal to state interference 
be taken.2^ The state at present exercises innumer- 
able influences through educational institutions 
and the employment of its police powers to encour- 
age education, thrift, and sobriety. More directly 
through industrial legislation the wage-earning 
class is protected and favored. A most important 
device for elevating and holding firm certain ele- 
ments in an elevated standard of Hfe is a system 
of insurance such as is in force in Germany. The 
German legislation provides against accident, sick- 
ness, old age, and invalidism. The fund for an old 
age pension is recruited one-third each from the 
public treasury, the employer class, and the wage- 
earning class. The sums contributed to provide 
insurance against sickness come one-third from 
employers and two-thirds from laborers. Accident 
insurance falls entirely upon employers. 

A plan for systematic effort in raising the 
standard of Ufe of the wage-earning classes has 
been formulated by the economist Professor Lugo 
Brentano. It contemplates the voluntary adoption 
by societies of wage-earners of a system of mutual 
insurance covering all the legitimate costs entailed 
in the production of labor.^^ Were such insurance 

20 Professor A. A, Issafev of St. Petersburg sanctions the inter- 
ference of the state to add to the number of those whose in- 
comes increase as the productivity of labor is increased. " Revue 
d'Economie Politique," article " Les Principales Causes des Crisis 
Economique," Tome VII, 1893, P- loo^^* 

21 A list of the principal types of insurance favored by Brentano 

98 



THE WAGE SYSTEM 

carried successfully it would entail such an expense 
as would materially strengthen the demand for 
higher wages. 

Any scheme for increasing the standard of life 
of the wage-earning class must provide for an 
organization sufficiently definite to give the move- 
ment consistency, put definite aims before its mem- 
bers, secure simultaneous movement, and, in general, 
make the desired course of action one easy to 
enter upon and difficult to abandon. More will be 
accomplished by avowing educational and self- 
preservative functions than by posing as aggres- 
sive and revolutionary in design. The demands 
made should appeal to all as reasonable and the 
methods taken to enforce them, while persistent, 
should be inoffensive. 

is given by him as follows : '* In order that the cost of labor may 
be covered, six types of insurance are necessary for the laborer : — 

1. Insurance of the cost of raising children, to apply in case 
of a child's death. 

2. Old age insurance. 

3. Burial funds. 

4. Invalid insurance or pension. 

5. Insurance against sickness. 

6. Insurance against loss of work, consequent upon crises and 
over-production." — "Die Arbeiter u. d. Produktionskrisen." 

While discussing the active measures which may be taken to 
prevent crises, Adler says, " Such a relief measure is the insurance 
of the wage-earner against loss of work resulting from crises; for 
the realization of this project, all friends of the present social 
order must therefore be united." — "Rodbertus," p. 58. More 
recently Adler has argued this more at length. Cf. "Ueber die 
Aufgaben des Staates angesichts der Arbeitslosigkeit," Tiibingen, 
1893. 

99 



ECONOMIC CRISES 

In conformity with these principles, Professor 
Brentano recommends the formation of voluntary 
insurance associations among the wage-earning 
classes, the object being to insure to one another the 
preservation, intact, of every portion of a legitimate 
standard of life. All demands are addressed to 
the members of the associations. No chain of 
reasoning regarding the origin of value is in- 
dulged in ; no fundamental principle of the present 
economic order is attacked ; nothing is asked from 
the state further than to be let alone.^^ The ultimate 
aim is manifestly so to elevate the minimum stand- 
ard of life as to bring a pressure to bear upon wages. 

The necessity for such a movement is based 
upon the observation that, in the purchase and 
sale of labor upon the market, all the necessary 
and legitimate costs of producing labor are not 
provided for in the wages received. Such trans- 
actions are not complete economically, and do not 
meet the claims of social justice. Fair wages must 
include more than enough to support the laborer 
while working, and must cover compensation for 
seasons of idleness due to sickness, old age, youth, 

22 Professor Brentano argues that to avoid crises by socialistic 
measures, it would be necessary not only to strictly control pro- 
duction, but to as strictly regulate consumption. This would be 
an unendurable intermeddling with private affairs. Some more 
flexible plan admitting of individual initiative is necessary, yet of 
sufficient strength to reach the present deep-seated evils of indus- 
trial society. Cf. " Die Arbeitsversicherung gemass der heutigen 
Wirthschaftsordnung," especially the part upon " Absatzkrisen"; 
Jahrbuch fiir Gesetzgebung, " Die Arbeiter und die Produktions- 
krisen," Bd. II, N. F., 1878, pp. 565-567. 

100 



THE WAGE SYSTEM 

lack of work, or other causes beyond the control 
of the laborer. Skill must be so paid for as to 
cover the expense of education and the risk of 
failure. The wages of those who work should 
include enough to support that proportion of every 
normal society of human beings which cannot or 
ought not to be earning wages.^ When one pays 
for a vase he pays not merely for the one given 
him, but for a part of those which have been ruined 
in the making or broken in handling. So the cost 
of labor should include the expense of those who 
die in youth or who, in age, live to be a charge 
upon others. As the vase in fashion must pay for 
a part of a superseded stock, so wages must take 
account of superseded skill. If these elements in 
the social cost of labor are not provided for directly 
by wage payments, they must be surreptitiously 
added as public or private charity. If withheld 
entirely, the deterioration of the society concerned 
is certain.^ 

23 Condorcet worked out an elaborate system of insurance, in- 
cluding general, education, old age, widows', and orphans' insur- 
ance, with the purpose in view of decreasing inequalities in the 
distribution of wealth. This insurance, he thought, should be 
applied primarily to the lower ranks of the wage-earning classes, 
and should be controlled either by the state or, if that be imprac- 
ticable, by voluntary private associations. The plan presented by 
Condorcet, in " Esquisse d'un Tableau Historique des Progres de 
I'Esprit Humain," is in many respects similar to that proposed 
by Brentano. 

■'2* A fine analysis of the elements composing the cost of labor 
is contained in Ernst Engel's, " Der Preis der Arbeit," Berlin, 
1868, p. 36 ff. 

lOI 



ECONOMIC CRISES 



RESUME 



I. Crises and the distribution of wealth to the wage-earners. 
II. Rodbertus' philosophy of industrial disorder. 

(a) Goods should be distributed according to their 
labor cost, (d) The present distribution 
causes crises as follows: (c) The wage- 
earner does not receive what he produces. 
(d) But the minimum to satisfy him to re- 
produce, (e) The difference is a surplus 
seized by the capitalist. (/") As the pro- 
ductivity of labor increases more rapidly 
than the standard of life, wages are a de- 
creasing factor of distribution, (g) Effec- 
tive demand depends largely upon wages. 
(//) The capitalist invests his surplus and 
increases production more rapidly than effec- 
tive demand increases, (i) The result is 
over-production causing crises. 
III. Remedies. 

1. Socialistic. 

(a) Socialization of capital, issue of labor time 

• checks equal in value to all goods produced. 

Regulated production to prevent oversupply. 

(^) Objections : — Labor theory of value false. 
Higher sorts of activities underestimated. 
Foreign trade would be impeded ; private 
enterprise checked. Would not increased 
wages encounter the Malthusian law of 
population? 

2. Attempts to elevate the standard of life. 

(a) German state industrial insurance. 
{d) Voluntary insurance of Brentano. Volun- 
tary insurance associations of workmen. 



102 



CHAPTER VI 

CRISES AND LEGISLATION 

Crises are socio-economic phenomena, and as 
such direct attention to the character of the eco- 
nomic relations which exist among the individuals 
constituting a society. One of the most important 
ways by which the social will regulates the charac- 
ter of these relations is legislation. Of all forms 
of social control this is the most distinct and in- 
flexible. The wisdom with which it is exercised is 
therefore of the greatest moment. It has been 
truthfully said that every problem has its legisla- 
tive side and bears its relation to legislation. The 
Hterature of crises shows that every period of eco- 
nomic distress has turned the attention of many 
thinkers to the criticism of existing economic legis- 
lation. Proposals for new laws and for revisions 
and improvements of every description appear in 
plentiful crops after every severe panic. A large 
proportion of the remedies suggested for crises pro- 
pose some extension of state activity, either in the 
form of legislation, agencies for investigation, or 
active government interference. It should be 
borne in mind, however, that such economic legis- 
lation as is enacted piecemeal can never afford 
103 



ECONOMIC CRISES 

adequate protection. The purposes of legislative 
interference will be defeated unless conditions less 
artificial and unstable than those already existing 
are established. A rational and comprehensive 
policy firmly adhered to (a thing so rare in mod- 
ern industrial legislation) is above all things desired. 

In judging of the importance of the considera- 
tions embraced in this chapter, it should be remem- 
bered that, notwithstanding steady improvements 
made in our code of commercial law, crises have 
been steadily recurrent, and that those means 
which now seem most promising for lessening the 
severity of crises are not legal remedies. During 
this century crises have been developing all 
their peculiar characteristics in countries having 
diverse legal traditions and practices. Further- 
more, scarcely any two crises seem to have 
strained exactly the same portion of the net- 
work of legal restraint. 

No attempt will be made in this chapter to give 
a complete discussion of the relation of crises to 
legislation. That would involve repetition, inas- 
much as some portions of such a discussion are 
necessarily presented in other chapters of this 
work. The present discussion will include the 
following topics : monetary legislation, banks, cor- 
poration law, and bankruptcy law. 

MONETARY LEGISLATION 

As economic crises usually involve a serious dis- 
turbance of the mechanism of exchange, it is only 
104 



CRISES AND LEGISLATION 

natural that they should have drawn attention to 
the monetary system prevailing at the time and 
place of their occurrence.^ The diversity of mone- 
tary conditions among the principal countries of 
the world, coupled with the fact that most of them 
have been visited by crises, warns us from attach- 
ing too much importance to details at this point. 
The liberty will be taken to present this subject in 
a very brief treatment, since the literature dealing 
with it at length is generally accessible. The sub- 
ject of the relation of monetary legislation to crises 
is one which inseparably connects itself with that of 
credit which is presented in the chapter on " Credit 
and Speculation." It is as intimately connected 
with the subject of banking which follows this. 
Finally, the monetary system of any country is 
only to be completely understood through a com- 
prehensive study of the financial history of its 
government. This point may be sufficiently 
proved by calling to mind the public financiering 
accompHshed through the Bank of England and 
the Bank of France by England and France re- 
spectively. In America it may be seen in the 
history of the United States banks and in the ori- 
gin of the national banking system, also in the 
present confusion between the fiscal and currency 

1 " A commercial crisis is always a monetary crisis as well, since 
it is the reduction of the reserve of coin in the banks which gives 
the signal for the explosion." — Juglar, in article " Crises Com- 
merciales," Sec. 2, in Say's "Nouveau Dictionnaire d'Economie 
Politique." 



ECONOMIC CRISES 

transactions of the United States treasury. No 
excursion will be made, however, away from the 
topic into the field of public finance. 

The essential elements of an ideal monetary sys- 
tem were given by Mr. R. M. Widney before the 
World's Congress of Bankers and Financiers at 
Chicago as follows : sufBcient volume, safety, elas- 
ticity, convertibiUty, uniformity, and circulation. 
The necessity of maintaining the stability of the 
standard of value needs no argument. Recent 
events in the United States show the effects of 
even a suspicion that a change in the standard 
will be made. A crisis emphasizes the primary 
importance of elasticity. No one proposes that 
the volume of note issue shall be so increased at 
any time as to render the scaling down of inflated 
and unreasonable values to a sensible figure a pro- 
cess either easy or pleasant. What is proposed is 
that the trading community shall feel assured that 
tho^e with proper securities can obtain money when 
it is needed. The English and American bank-note 
systems fail in this regard. The Peel Bank Act of 
1844 must be suspended in time of crisis to permit 
the issue of notes on securities. The American 
system leads to stringency of the money market 
and the hoarding of gold (a phenomenon unusually 
prominent in 1893 for special reasons). This situ- 
ation of things is only to be relieved by such devices 
as the issue of clearing-house certificates and the 
sale of certified checks. The experiences of every 
crisis in the United States enforce the necessity of 
106 



CRISES AND LEGISLATION 

retiring the United States legal-tender notes, or of 
otherwise breaking up the endless chain by means 
of which the government is forced to issue the 
obligations which on the one hand come back to 
draw out the gold from the treasury, and on the 
other coming in in payment of revenue, add noth- 
ing to the stock of gold. 

BANKS 2 

The functions of a bank are pointed out by 
F. A. Walker in his " Money, Trade, and Industry " 
to be as follows: (i) to assist in public financier- 
ing ; (2) to provide good money ; (3) to facilitate the 
cancellation of indebtedness ; (4) to remit money 
and conduct exchanges ; (5) to provide a place of 
safe deposit ; (6) to serve as an intermediary in the 
loaning of capital ; (7) to issue paper currency. Of 
these functions the first one and the last two call 
for special remark in connection with the present 
discussion, but the function of a bank as an inter- 
mediary in the loaning of capital is by far the most 
important of the three. 

Banks are the arena of the money market, and 
what takes place on this market is conditioned in 
an important manner by the constitution 'and cus- 
tomary practices of banks. Yet the literature of 

2 For a more extended discussion of some of the topics con- 
tained in this section, see the author's monograph, "The Relation 
of Economic Crises to Erroneous and Defective Legislation," pub- 
lished in Transactions of the Wisconsin Academy of Science, Arts 
and Letters, Vol. X. 

107 



ECONOMIC CRISES 

crises amply shows that their control of the course 
of the money market and their responsibility for 
all that occurs on it are greatly overestimated. 
Banks are institutions of economic society which, 
like all other institutions, are adapted by the 
society using them to the working out of its pur- 
poses, just as the institution of the family is 
adapted in different countries to the expression of 
the ideas peculiar to the people. Although the first 
visible signs of a coming crisis are to be detected 
in the banks, and although the most spectacular 
and distressing phenomena of crises are usually 
enacted in connection with them, the rise of indus- 
trial storms is usually elsewhere than in the bank- 
ing system. 

It should be, of course, the aim of every intelli- 
gent community to place all necessary safeguards 
about an institution so vital as that under con- 
sideration ; yet here, as elsewhere, the burden of 
proof lies with those who urge restrictions. It is 
best to trust as far as experience dictates to those 
automatic checks which arise from the operation 
of self-interest and from the selective process of 
competition. 

To enumerate a few suggested reforms applying 
to the banks of the United States, and germane to 
our subject, we may say in the first place that 
adequate safeguards should surround the granting 
of bank charters. An earnest effort should be 
made to secure uniformity in this regard among 
the states of the United States, and to provide for 
io8 



CRISES AND LEGISLATION 

an official examination and publication of accounts 
which shall be efficient and uniform. The pub- 
lished statements of banks can be made something 
more than a form if there is present in a trad- 
ing community a determination to have them so. 
What is needed is a statement, plain and simple, 
in answer to the question, " Is this bank safe ? " 
Bank statements should throw such light upon 
that question as the present financial condition of 
the bank can afford. 

The official examination of the national banks 
as made by the comptroller of the currency may 
serve as a model to state officers in the matter of 
examinations. It should be distinctly understood, 
however, that such examinations are in no way 
intended to relieve bank directors of their duties. 
The careful scrutiny into the affairs of a bank 
maintained by its directors is the chief safeguard 
of its integrity. These duties of directors need 
careful definition. Every opportunity which will 
not work undue individual hardship should be 
taken to make more clear and strong the moral 
idea of the duty of bank directors. We need a 
greater development of the conception of an honor 
office, or of the idea of duty as it is recognized 
by the legal fraternity in the United States at the 
present time with reference to guardianships.^ A 

* A petition for a new banking law presented to the "Wisconsin 
state senate in 1899 recites the condition of affairs with respect to 
bank directors, and proposed a cure for the same as follows : — 

"I. It is often the case that men of prominence and responsi- 
109 



ECONOMIC CRISES 

slovenly and easy-going practice should not be 
permitted in the matter of the bonds given by 
bank ofificers and officers of loan and trust com- 
panies. Restrictions are desirable upon the loans 
and discounts made by a bank to its executive 
officers and employees, or to directors who are not 
officers. 

Between banks a form of control may be exer- 
cised by a clearing-house. As stock exchanges 
can exercise much control over the business con- 
duct of their members, and in a less degree of 
corporations by admitting their securities to the 
market or rejecting them from it, so a clearing- 
house may be made a valuable institution for 
control. 

Before closing this section of the topic it is 
necessary to take note of two important discus- 
sions upon the principles of banking which are to 
be found in the literature of crises. 

The first is the discussion as to which is prefer- 

bility permit themselves to be directors and ofBcers of banks 
without having much interest in them and w^ithout incurring any 
considerable liability in case of failure. Such men are mere figure- 
heads or decoys to draw business to the banks, and have neither a 
voice in the management nor money at stake. Hence they never 
trouble themselves with the affairs of the bank, or know its condi- 
tion. Every one who permits himself to be a director of a bank 
ought to be liable to depositors for something beyond his liability 
as a stockholder. Make the directors liable to depositors for an 
amount equal to the capital stock of the bank. Thus, if the capital 
of the bank is ^50,000, and there are five directors, make each 
director liable for $10,000, in addition to his liability on stock; and 
if the capital is $100,000, make each director liable for $20,000." 
IIO 



CRISES AND LEGISLATION 

able, a single bank of issue or competing banks. 
It was begun in France in 1848, in which year the 
monopoly of the Bank of France was completed. 
It was closed by the Franco-Prussian War of 
1870-71, during which the managers of the 
bank by their patriotism excited the general ad- 
miration of France. The gist of the argument 
as it relates to crises may be given as follows : — ■ 

Those who uphold the monopoly of note issue 
granted to the Bank of France, point to its record 
and to the great immunity which France has 
enjoyed from financial panics as an evidence of 
the soundness of the system. The single bank 
system, it is urged, has the great advantage of 
locating responsibility in a definite place. It puts 
an unmistakable duty upon those in whose hands 
the course of monetary affairs rests, and makes 
impossible the negligence and irresponsible ven- 
turesomeness observable with a multitude of com- 
peting banks. Public opinion is able to exercise 
a powerful influence when concentrated upon one 
management through publicity of accounts. The 
very independence of a bank with monopoly privi- 
leges removes from it all temptation, such as might 
be presented in competition with rivals, to extend 
its issues beyond the limit of safety. As the strug- 
gle to earn dividends is absent the bank may order 
its policy to secure public welfare. 

A competing bank, it is urged, must outdo com- 
petitors to obtain trade, and it must therefore be to 
an undue extent subordinated to the desires of its 



ECONOMIC CRISES 

patrons. The effect of competition is to reduce 
the reserves maintained for redemption of notes 
below the point of safety. When such is the case, 
the presentation of large quantities of notes for 
redemption or any other unusual demand upon the 
resources of the bank finds the funds insufficient 
to sustain the great issue which has been reared 
upon them. Distrust spreads the demand to other 
banks in a similar condition, and the system, 
honeycombed by competition, falls into ruins. 
Suspension of banks, stringency of the money 
market, and a panic ending in a depreciated or 
worthless paper currency are the results. Each 
bank endeavors to save itself at whatever cost to 
its competitors. No bank is strong enough to 
extend assistance and command confidence. 

Here again the champions of the monopoly of 
note issue urge the advantage of the power of a 
single great estabhshment. Its connection with the 
government gives it position and solidity and in- 
creases the effect of its mere financial resources in 
inspiring that credit which is the object of all search 
in times of crises.* Then it is preeminently that a 
great bank can put forth its powers, or, as has 
been the case in the history of the Bank of Eng- 
land, reestablish confidence by the mere prospect 
of its assistance. 

* E. Nasse, " Ueber die Verhiitung der Productions- Krisen durch 
staatliche Fiirsorge," in "Jahrbuch fiir Gesetzgebung," Bd. Ill, 
N. F. Also A. Wagner, " Geld- und Credittheorie der Peel'schen 
Bankacte," p. 193 ff. 

112 



CRISES AND LEGISLATION 

A considerable school of French writers has 
held views opposed to those we have just con- 
sidered, maintaining that the cause of economic 
crises lies in the abuse of power on the part of 
privileged banks of issue. It is held to be an 
inevitable accompaniment of a privileged bank 
under state control that there should be a political 
faction opposed to it. The bank is therefore never 
entirely out of politics, and at the worst may be 
the foot-ball of parties. 

Out of a close relation of a bank to public 
finances other evils may arise. If the government 
is often strengthened, the bank is as often weak- 
ened. The course of bank-notes becomes subject 
to all the influences affecting the pubHc credit. 
A privileged bank, owing its peculiar privileges to 
the state, cannot resist the demands of the state as 
can independent banks. And it has less reason 
for doing so, since, if its resources are overtaxed 
and it finds itself unable to redeem its notes, it is 
sure of protection from the state in laws restrict- 
ing the redemption of notes or suspending it en- 
tirely. As Lord Overstone said, a private banker, 
if he mismanage affairs, must suffer the penalty 
and be bankrupt, but if the Bank of England is 
guilty of mismanagement it can save itself at the 
expense of the entire country.^ 

The history of the Bank of France and of the 
Bank of England has been cited as proof of these 

^ " Report of Committee of House of Commons on Commercial 
Distress," 1847-48, N. 5192. 

113 



ECONOMIC CRISES 

assertions. The recognized connection existing 
between the government and the Bank of France 
caused distrust of the notes of the latter when the 
invading armies entered France in the winter of 
1813-14. A legal restriction of the amount of 
notes that could be presented for daily redemption 
followed. Similarly in England ; the war with 
France caused the government to make such 
demands upon the Bank of England that in 1 795 
its credit was impaired and specie payments were 
suspended, not to be resumed until 1821.^ 

Again it is argued that a single bank of issue, 
because it receives very large deposits, tends to 
extend a note issue depending upon them as a 
redemption fund. This issue cheapens the price 

6 M. Chevalier says in reviewing Horn's book, " La Liberie des 
Banques," in "Journal des Economistes," Vol. Ill, 1866, p. 357: 
" With an analytical spirit the distinguished M. Horn has sought for 
the reason why the great privileged banks have been so often in 
default. He has stated the cause; a cause which, it is necessary 
to say, is very uniform, and which one finds identically the same in 
both hemispheres. That cause is the interference of government 
in the affairs of the banks. To speak with greater precision, the 
causes are the accommodations which governments have demanded 
from the banks, the great advances which the banks have been 
forced to make, when in theory a bank should only make advances 
on commerce. The privileged banks have not been able to refuse 
these accommodations, because of the very fact that they are privi- 
leged." Cf. Horn, " La Liberte des Banques," p. 395. A. Wagner, 
" Lehre von den Banken," p. 15, says that if the state always came 
to the rescue of competing banks with a grant of legal-tender 
powers in case of financial difficulty, as is done with privileged 
banks, it would not be difficult for them in like manner to bring 
back their finances to a state of order. 

114 



CRISES AND LEGISLATION 

of money and throws some portion of private 
capital out of investment. This flows into the 
vaults of the banks and serves in turn as the basis 
of an extension of note issue. The cheapening of 
the price of money ruins private banks, and the 
business of banking becomes more and more con- 
centrated. Thus a process of displacement goes 
on, during the progress of which an enormous 
note issue is built up, erected upon an uncertain 
balance of deposits. The end of the progression 
is that some unexpected turn causes a heavy draft 
upon the state bank and at once precipitates a 
financial crisis. Under a system of free banking 
it is urged that these evils are avoided. Every 
attempt to realize an undue profit in the issue of 
notes, if successful, attracts new capital, and com- 
petition is increased until the same level of profits 
is reached in selling money as can be secured in 
any other branch of competitive industry.^ 

Each competitive bank has the check of redemp- 
tion thrust constantly upon it by other banks en- 
deavoring to extend their issues.^ 

Before passing from this subject it is well to 
recall the fact that banks are simply commercial 
institutions, subject to the same stimulating and 

^Coquelin, "Revue des Deux Mondes," Vol. XXIV, 1848, pp. 
457-470. Precisely the same theory and explanations are to be 
found in H. C. Carey's "Credit Systems," pp. 57-58 and 66. 
Coquelin recognizes Carey's work, and commends it highly. 

8 Courcelle-Seneuil, "Journal des Economistes," Vol. XLIII, p, 
163. A better explanation may be found in " Report of the Mone- 
tary Commission of the Indianapolis Convention, "1898, pp. 325-327. 



ECONOMIC CRISES 

depressing influences which play upon the com- 
munity in general. As Professor Sumner has well 
said in his " History of the American Currency " : 
" It is a very easy method of explaining mercantile 
and industrial movements to ascribe them entirely 
to expansions and contractions of the (furrency, 
but, on a currency even nominally convertible, the 
currency inflation does not lead off. The mania 
for sudden riches gets possession of the com- 
munity, and the banks fall in with, aid, and stimu- 
late it. The blame cannot be simply thrown upon 
the banks for causing the trouble." ^ 

The second discussion to which reference has 
been made is that carried on in England from the 
beginning of this century down practically to date, 
and centering in the Peel Bank Act of 1844.^'^ 

The Enghsh Bullion Committee was appointed 
in 18 10 to inquire why there was a depreciation of 
bank-notes during the " Bank Restriction Period," 
when the Bank of England did not redeem its 
notes. This committee maintained that a suffi- 
cient regulation to maintain paper money at par 
with gold was to insure its constant convertibility. 
As reasonable as this proposition now seems, it 
was disputed. A group of thinkers appeared 
somewhat later, known as the " Currency School," 
who asserted that if there was no paper money 

^ Sumner, " History of American Currency," p. 124. 
1"^ The text of this act is printed in H. V. Poor's " Money and its 
Laws," 2d ed., pp. 297-298, also in "The English Manual of 
Banking," by Arthur Crump, 4th ed., London, 1897, pp. 286-289. 
116 



CRISES AND LEGISLATION 

each country naturally attracted the amount of 
the precious metals corresponding to the amount 
of business done within it. This ebb and flow is 
the natural and desirable state of affairs. To 
maintain it when paper currency is issued, the 
convertibility of the paper is not sufficient. There 
must be a device so arranged that as coin is with- 
drawn from circulation a like amount of paper is 
withdrawn, and vice versa. Otherwise, it was 
claimed, silver and gold might leave a country, 
and paper take its place in circulation. Under 
such circumstances, prices will not respond to the 
drain of precious metals. Not only will the proper 
relation between the amount of the precious metals 
in the country to that in other countries be dis- 
turbed, but also that between the paper and the 
coin in circulation. It was believed that con- 
vertible paper could be so overissued, and coin 
reserves so depleted, that the final readjustment 
to proper conditions would be violent and destruc- 
tive." 

On the substitution of notes for gold in the cur- 
rency, Pitt said, when introducing his bill : " The 
difference may not be immediately perceived ; nay, 
the first effect of undue issue, by increasing prices, 
may be to encourage further issues ; and as each 

11 References on this point are Pitt's speech in Parliament; 
Tooke, "History of Prices," Vol. IV, p. 187; Vol. V, pp. 507-512; 
Torrens, " Inquiry into Renewal of Charter of the Bank of Eng- 
land," pp. 48-50; James Wilson, " Capital, Currency and Banking," 
pp. 58, 59; A. W^agner, " Peel'schen Bankacte," various citations. 
117 



ECONOMIC CRISES 

issuer, when there is unlimited competition, feels 
the inutility of individual efforts at contraction, 
the evil proceeds until the disparity between gold 
and paper becomes manifest, confidence in the 
paper is shaken, and it becomes necessary to 
restore its value by sudden and violent reductions 
in its amount, spreading ruin among the issuers of 
paper, and deranging the whole monetary transac- 
tions of the country." It will be observed that this 
presents a theory of crises. We shall not consider 
the fallacious reasoning in regard to the nature of 
convertible paper money contained in it, but will 
confine ourselves to the relation of this discussion 
to crises. 

This theory was responsible for the Peel Bank 
Act of 1844, which has regulated the business of 
the Bank of England since the time of its passage. 
The bank is divided into an issue department and 
a banking department. Notes can be obtained from 
the issue department only by the deposit of a cor- 
responding amount of gold by the banking depart- 
ment with it to insure redemption. When the 
banking department is called upon for deposits, 
therefore, it is obliged to present notes to the issue 
department to secure the gold, thus withdrawing 
paper from circulation. This brings about a close 
correspondence between the movement of gold 
and notes in and out of the bank. 

The effect of this provision has simply been that 
during financial panics, when bank accommodation 
is most anxiously sought for, individual depositors 
118 



CRISES AND LEGISLATION 

draw out their deposits from the bank and that 
institution is obliged to relentlessly withdraw its 
notes from circulation pari passu with the with- 
drawal of the gold from its vaults. Such an auto- 
matic stranghng of the money market has been 
found intolerable. In 1847, within three years 
after the passage of the act, the law was sus- 
pended to permit the bank to relieve the strin- 
gency of the money market by issuing notes upon 
securities.^2 The relief in this instance was imme- 
diate. In the stringency of 1857 the act was sus- 
pended, and discounting allowed at 10 per cent. 
At this time the permitted issues of notes but 
slightly exceeded the legal limits. In 1866 the 
act was suspended for the third time, but the mere 
assurance that notes could be had was sufficient, 
and no actual infringement of usual rules was 
found necessary. 

CORPORATION LAW 

The forms into which capital is combined for 
the furtherance of business purposes are of con- 
siderable importance in determining the tendencies 
manifested by business enterprise. These forms, 
more especially corporate forms, are partly under 
the control of legislation, since they owe their 
origin to the grant of legal powers given by the 
state. Some of these forms have shown them- 
selves to be fitted for certain classes of under- 

12 An Austrian copy of Peel's act underwent the same fate. 
119 



ECONOMIC CRISES 

takings only, and through some of them the spirit 
of overspeculation and dishonesty has been able 
to work itself out much more easily than through 
others.^^ 

The study of the organization of joint stock 
companies has been introduced into the literature 
of crises chiefly through the experiences of Ger- 
many and Austria after the close of the war of 
1870-71, culminating in the so-called "Vienna 
crash" of 1873.^* In Germany, by the middle of 
1870 there were 410 joint stock companies having 
a capital of 3,078,000,000 marks. In the four years 
following, 857 new companies were organized with 
a capital of 4,290,000,000 marks. That the growth 
was abnormal was amply shown by the insolvencies 
of the following years. Attention was thereby 
drawn to the laws controlling joint stock business. 
The United States has suffered from unsound and 
unscrupulous methods in the organization and con- 
trol of corporations, and has had this as a contribu- 
tary cause of economic crises.^^ 

12 The juristic person is now too often used as the " persona " 
once was in Rome — as a mask to hide the true actors. Corpora- 
tion methods would in many cases be immediately recognized as 
infamous if they were merely transferred to the sphere of private 
actions and relations. Cf. Report of Eleventh " Kongress deutscher 
Volkswirthe," 1869. 

1^ The principal writers who have contributed to the discussion 
are Wagner, Schaffle, Wiener, Oechelhauser, Kleinwachter, and 
Emminghaus. 

15 For an excellent concise enumeration of the advantages and 
disadvantages of the joint stock form see Schaffle in "Tubinger 
120 



CRISES AND LEGISLATION 

The system of granting charters by special legis- 
lative enactment which prevailed in Germany dur- 
ing the period mentioned has always shown itself 
to be inadequate, open to favoritism, and without 
proper uniformity in its operation. Experience 
has shown the wisdom of comprehensive legisla- 
tive enactments under which companies are to 
be organized. Such laws may restrict the joint 
stock form to those businesses in which experience 
has proven it to be useful, and may provide those 
peculiar safeguards necessary for each grand divi- 
sion of corporations, dividing them according to 
the characteristics displayed by them when in 
operation. 

As far as possible speculative incorporations 
designed to exploit the investing market by the 
sale of stock should be discouraged. Any profit 
which may arise to any one from the mere process 
of founding and financing a company should be 
clearly understood and formally stipulated between 
those who organize a company and those who 
invest their money in it. As far as possible, re- 
muneration for valuable knowledge, inventions, 
or other services, when made to the organizers, 
should be in a form to attach the interest of the 
recipients to the permanent success of the busi- 
ness. This may be done by means of royalties. 

Zeitschrift," 1869, pp. 336-338. Cf. Conrad's " Lectures," 3d ed. 
(privately printed), pp. 67-68; Rogers, " Industrial and Commer- 
cial History of England," Series I, Ch. VII; Roscher, "Nationalo- 
konomik des Handels und Gewerbfleisses," 2 Aufl., Sees. 28, 29, 30. 
121 



ECONOMIC CRISES 

In general the interests of organizers should be 
compelled to depend upon the prospects of legiti- 
mate and continuous business. 

The management of corporations seems to show 
that a continuous and active control of a corpora- 
tion by its stockholders, if they are more numerous 
than can get their heads together in a private office 
or around a consultation table, is difficult to put in 
operation. Because of this difficulty the sphere of 
corporate business, unless under special state super- 
vision, appears to be those businesses which require 
a large proportion of fixed capital and in which the 
management, when once inaugurated, is largely 
automatic.^^ 

So far as the principles governing corporate busi- 
ness permit of being expressed in a few words, the 
evils of mismanagement appear to originate from 
abandoning in a greater or less degree the demo- 
cratic principle. The concentration of great dis- 
cretionary power in the hands of directors, without 
an easy means of appeal and investigation open 
to the stockholders, diminishes the feeling of 
accountability in the former and of interest in 
the latter. Manipulations upon the stock market 
to drive the smaller stockholders to sell are natu- 
ral when a bare majority of stock gives control. 
It may be suggested that the voting power of 
shares should be decreased in proportion to their 
concentration in a few hands. A maximum of the 

i» Adam Smith's " Wealth of Nations," Bk. V, Ch. I, Part III, 
Art. I, Sees. 36, 51-59. 

122 



CRISES AND LEGISLATION 

votes to be cast by one person may be specified.^*^ 
A time should be stipulated within which share- 
holders shall meet to elect directors, after organi- 
zation. It may be found advisable to adopt a 
plan of minority representation on the board of 
directors. 

Many American railway corporations have se- 
cured the greater part of the money with which 
their roads were built from bonds. ^^ As the voting 
power is restricted to stock, such companies have 
been in the hands of a few ** insiders." These 
corporations are miscreations, due to the fact that 
legislatures have allowed stock to be issued for a 
merely nominal cash payment and have given un- 
limited borrowing power. The borrowing power 

1'^ The distribution of the voting power in the First and Second 
Bank of the United States was as follows : 

For every one or two shares ... , i vote 

For every additional two shares up to lo . .1 vote 
For every additional four shares from lo to 30 . i vote 
For every additional six shares from 30 to 60 . i vote 
For every additional eight shares from 60 to 100 . i vote 
For every additional ten shares from 100 up . i vote 
No person, copartnership, or body politic to have more than 
thirty votes. 

First Charter I, Sec. 7, Second Charter I, Sec. ii. 
1^ See Von der Leyen, " Die Finanz- und Verkehrspolitik der 
Nordamerikanischen Eisenbahnen " in " Archiv fur Eisenbahn- 
wesen" (published by the Prussian Department of Public Works), 
Heft I, 1894, especially the heading "Die Griindung einer Ameri- 
kanischen Eisenbahn." See also Van Oss, "American Railroads 
as Investments" (New York, 1893), ?• S^- Upon the abuse of 
joint stock business forms in relation to crises see A. Wagner, 
"Krisen," in Rentzsch's " Handworterbuch," p. 531. 
123 



ECONOMIC CRISES 

of a corporation should be limited to a certain 
fraction of the capital actually paid in. No com- 
pany should be allowed to purchase its own shares, 
or sell them at a discount.^^ The issue of stock 
dividends should be forbidden and also of divi- 
dends drawn from capital. The financial atmos- 
phere would be greatly cleared, and the secret 
machinations of schemers which so disquiet trade 
and discourage honest industry would be largely 
stopped, were a public record required with the 
register of deeds for each purchase or transfer 
of corporation shares. Finally the laws govern- 
ing corporate business may define the manner in 
which the assets of a company are to be reached 
for the payment of its debts through the machinery 
of bankruptcy law. 

BANKRUPTCY 

This brings us to the subject of bankruptcy, in 
regard to which a few points may be noticed. It 
is obvious that a very considerable influence must 
be exerted upon the general course of business by 
those regulations which determine what shall be 
done when a person's assets are not equal to his 
liabilities. The character of a bankruptcy law will 
determine in some degree how severely the effects 

1^ The lack of a provision to this effect in French law led to the 
manipulations on the stock market carried on by the "Union 
Generale." This was shortly followed by its failure in 1882, pre- 
cipitating a severe financial crisis, one of the few to which France 
has been subjected. 

124 



CRISES AND LEGISLATION 

of an economic crisis are felt by those immediately 
concerned in bringing it about. Through its pro- 
visions there will be expressed the attitude of trade 
toward such practices as are supposed to lead up 
to crises. 

It is desirable that a sharp distinction should be 
drawn between the laws used to enforce the pay- 
ment of ordinary debts and those used in set- 
tling commercial indebtedness. There are debtors 
whose business necessarily involves them in the 
credit mechanism of trade to such an extent that 
their solvency depends not alone upon their busi- 
ness and moral characteristics, as in the case 
of farmers, wage-earners, and professional men. 
There are many businesses the solvency of which 
depends in a very important degree upon the gen- 
eral course of trade and the occurrence and dura- 
tion of credit storms ; in short, upon circumstances 
beyond the control of their managers. For the 
insolvent commercial creditor special provisions 
are therefore justifiable. 

In its action a bankruptcy proceeding may be 
likened to a crisis. Insolvency with bankruptcy is 
indeed a crisis for one business, while a general 
crisis is the simultaneous occurrence of many in- 
solvencies. The scramble for liquidation which 
marks the crisis is analogous to the "race of dili- 
gence " among creditors, which is set up when a 
suspicion of embarrassment attaches to a debtor. 
Bankruptcy, like a crisis, may be a healthy check 
and restorative, when appHed at an early stage. 
125 



ECONOMIC CRISES 

But either, when delayed, may be a dreaded cut- 
ting down to actual conditions. 

The aims which should control legislation upon 
bankruptcy may be stated to be, as regards the 
creditor, a just, speedy, and economical distribu- 
tion of the debtor's property; as regards the 
debtor, either to restore him as far as possible 
to an independent position or to administer pun- 
ishment for neglect and fraud, as the facts may 
indicate. Sometimes one of these aims, sometimes 
the other, has been the dominant one in legisla- 
tion. If a state of insolvency is considered chiefly 
as due to misfortune, the most fair and economical 
method of clearing the score and giving the debtor 
a new chance in business is the thing desired. If, 
on the other hand, a suspicion of negligence or 
dishonesty usually attaches to insolvency, a fair 
trial, with suitable provision for punishment, should 
be the main aim. Undoubtedly there is room for 
both these points of view in the correct concep- 
tion. The problem is to preserve the proper bal- 
ance between them. On the one hand, undeserved 
hardship to debtors must be reduced to the small- 
est possible minimum. On the other hand, the 
influence of bankruptcy legislation upon business 
morality must not be forgotten. 

The most important aim of bankruptcy legisla- 
tion is to discourage insolvency. But it is not 
the most severe legislation which always has the 
desired repressive effect, as the entire history of 
criminal law proves. Beccaria points out in his 
126 



CRISES AND LEGISLATION 

great work, ** Crime and Punishment," that a law 
which is too severe revolts the mind, and becomes 
a dead letter. This principle applies to the case 
in hand. Business men or firms maintaining nu- 
merous commercial connections will not employ 
bankruptcy proceedings when to do so creates a 
very general prejudice against them in the busi- 
ness community. The effect of great severity in 
legislation is similar to an error on the side of 
undue liberality. 

A law which is too favorable to the debtor may 
be used as a menace by him in dealing with 
creditors to compel further advances and secure 
a continuation of unsound methods of doing busi- 
ness. The trouble with the state banks of issue 
in the United States between 1812 and 18 18 arose 
partly from a wretchedly loose practice with refer- 
ence to bankruptcy. An ever ready way of retreat 
was open for dishonest bankers, a fact which 
undermined commercial morality. 

We ought by no means to overlook those con- 
ditions of modern business which render it impos- 
sible, at certain times, for even conservative 
businesses to maintain their solvency. While the 
bankruptcies of certain periods indicate a general 
breakdown of the industrial system rather than 
individual dishonesty, nevertheless no contrivance 
should be set in operation, through the provisions 
of bankruptcy, which removes from the abuser of 
credit the force of the law, ** The way of the trans- 
gressor is hard." The counterfeiter, by his dis- 
127 



ECONOMIC CRISES 

honesty, throws doubt upon the authenticity of the 
coin of the country, but the man who abuses credit 
injures that which facihtates business even more 
than coin in the trade of the modern world. The 
counterfeiter of coin puts an expense upon all who 
deal in coin, the abuser of credit injures all who 
are affected when trade abandons any measure 
of the economy and convenience of credit. If the 
condition of credit was once a private matter, while 
the issue of coin was a public affair, those times 
have passed, for both are now equally matters of 
public concern. 

In the construction of a law of bankruptcy it 
seems to be wise to permit both voluntary and 
involuntary proceedings, that is, to permit applica- 
tion to be made either by the debtor or by his 
creditors. In connection with crises the determina- 
tion of what shall prevent the discharge of an in- 
solvent person is a most important point. The 
principal hindrances to discharge in France are ex- 
travagance in personal or household expenses, spec- 
ulation upon the stock market, the adoption of ruin- 
ous methods to delay bankruptcy, or the attempt 
to favor any creditor unduly. In England, in addi- 
tion to other impediments, no insolvent person can 
be discharged whose estate does not amount to 
fifty per cent of his liabihties. According to the 
United States law of 1867, evidences of fraud, or 
fraudulent gifts or conveyances, were a bar to 
discharge, also losses through gaming and the 
failure to keep proper books. If an estate did not 
128 



CRISES AND LEGISLATION 

yield thirty per cent, the concurrence of a majority 
of the creditors, both as to number and the value 
of claims, was required to secure discharge. In 
second bankruptcy the minimum necessary for 
discharge was placed at seventy per cent. The 
Act of 1898 provides that the commitment of acts 
punishable by imprisonment under the bankruptcy 
law and the failure to keep books, or the destroy- 
ing or removing of the same to conceal material 
facts, shall bar discharge. 

CONCLUSION 

In conclusion it may be said that the task of the 
state in enacting wise laws to regulate economic 
interests is becoming continually more important 
and more difficult of performance. This means 
that more ability is being required of legislators. 
In view of this it is not encouraging to contem- 
plate the types of men being returned to the vari- 
ous state legislatures of this country nor even the 
types in Congress. The indirect and unexpected 
effects of legislation have so often afforded a 
severe surprise to the interests affected by them 
that it is time the lesson should be learned and 
these matters be made the subject of careful and 
complete study prior to legislative action. It is 
an encouraging sign that elaborate legislative in- 
vestigations are becoming the rule in this country, 
as they have long been in England. 



129 



ECONOMIC CRISES 



RESUME 



The importance of legislative enactments not to be over- 
estimated. 
I. Monetary legislation. 

Essentials of an ideal monetary system. 
II. Banks — their relation to crises. 
(a) General considerations. 
Functions of a bank. 
Care in granting charters. 
Examinations and publication of statements. 
Duties of directors. 
Control through clearing-houses. 
{d) Should competition be permitted in the issue of 

bank-notes ? 
(c) Peel Bank Act of 1844. 

III. Corporation Law — abuse of corporate privileges. 

Restriction of privilege of incorporation. 
Speculative incorporations to be discouraged. 
Financial claims of organizers to be made definite. 
Royalties. 

Control by stockholders. 

The democratic principle — distribution of voting 
power. 

IV. Bankruptcy. 

Two motives : — 

To discharge the honest debtor. 

To punish the dishonest insolvent. 
Citation of impediments to the discharge of debtors. 



130 



CHAPTER VII 

THE PERIODICITY OF CRISES 

If we consider the long series of crises which 
have marked the progress of industry, from the 
time when crises first began seriously to attract 
the attention of economic writers in the latter 
part of the eighteenth century down to the pres- 
ent, it can scarcely escape the observation of any 
person that these events have been distributed 
chronologically with a certain uniformity of inter- 
val. In the economic life of Western Europe and 
the United States the coming of a crisis has never 
been very long delayed nor have full-fledged 
crises of the first degree of intensity been at 
any time developed within at least six or eight 
years of one another. This general tendency to 
an evenness of spacing between crises has sug- 
gested to some students of the subject that there 
must be a law in the recurrence of these phenom- 
ena, tending to establish a definite periodicity. If 
such a law could be discovered and its nature 
explained, it would of course throw light directly 
upon the causes of crises. 

To grant that a phenomenon is of periodic 
occurrence does not necessarily imply that the 
131 



ECONOMIC CRISES 

force which causes it is spasmodic or lacking in 
continuity. A regularly operating force, when at 
a certain point its cumulated effects disturb the 
equilibrium under which the force has up to that 
time operated, may manifest itself only periodically 
in certain of its aspects. The simplest illustra- 
tions of this are the intermittent spring and the 
geyser. We know that muscular and nervous 
activity is intermittent in character. Periodicity 
has been declared to be a fundamental character- 
istic of all individual physical and intellectual 
activities of human beings. But it does not neces- 
sarily follow from this that all social phenomena 
are periodic or even intermittent. Social activities 
may be sustained continuously by a group of indi- 
viduals, a part of whom are continually being 
replaced by others. The argument concerning 
physical or nervous exhaustion as derived from the 
study of the individual, cannot without further 
proof be applied to all classes of social action. 
The work of a factory may continue uninter- 
ruptedly while the individuals connected with it 
are regularly replaced before exhaustion incapaci- 
tates any one from rendering service. 

While, therefore, social forces are capable of a 
continuity of which individual activities are not, 
nothing is of more common observation than that 
in the irregular and intermittent character of their 
life history social movements continually remind 
us of individual activities. There is clearly enough 
a periodicity of economic phenomena resting upon 
132 



THE PERIODICITY OF CRISES 

the succession of the seasons. The spring is the 
season for plans, the summer for activity in carry- 
ing them out, the fall for settlement and liquida- 
tion, the winter for the conservative discharge of 
merely necessary economic functions. Every 
season has a character of its own. 

But there are other periodic social phenomena 
which appear to indicate certain peculiarities in 
the social psychology. It has been noticed that 
movements for reform in municipal affairs in cer- 
tain American municipalities have been not only 
spasmodic but regularly recurrent. 

If one may venture upon a theory to explain 
this, it may perhaps be said that the steadily oper- 
ating force is the self-interest of those in politics 
"for what there is in it," and that the progressive 
exhibition of this self-interest at length exhausts 
the patience of the citizens and leads to the pre- 
cipitation of a crisis in municipal affairs. But the 
reform spirit not having the enduring power of 
the motive of self-interest soon dies out and a 
new cycle is entered upon. 

It has been noticed that the movement of settle- 
ment westward across the American continent has 
not been continuous, but has been accompHshed by 
a succession of waves of population moving on to 
new territory. As Professor F. W. Taussig has 
said : " The process of settHng the country and 
taking up the new lands of the United States has 
never taken place by regular and steady steps. It 
has taken place by spells of great activity . . . fol- 

i33 



ECONOMIC CRISES 

lowed by periods of dulness and reaction, in which 
the advance for the time being has almost ceased. 
At intervals of ten years, more or less, the popu- 
lation has gone west too fast, and then has waited 
to recover and take breath for a new effort." ^ 

In many kinds of social activity it appears to be 
necessary that a certain lapse of time should occur 
between the application of any given stimuli in 
order that there shall be a strong social reaction 
to them. The lapse of time between presidential 
elections in the United States refreshes the public 
thought and results in an intensity of interest in 
these political contests which is probably some 
function of the interval. The patriotic enthusiasm 
exhibited by the American people in the recent 
war was in part due to the slumber of these 
sentiments for thirty-five years. 

In the sense above indicated the crisis is an 
intermittent phenomenon. Many writers have 
gone further than this, however, and claimed for 
crises a periodic law. The literature of the sub- 
ject shows that the manner in which a writer 
explains crises has controlling weight in determin- 
ing whether he is able to see evidences of perio- 
dicity in the string of crises or not. As the idea 
of periodicity accommodates itself in a remark- 
able way to most theories of crises, its recognition 
is quite general. The first to remark upon the 

1 " The Silver Situation in the United States," publication of 
American Economic Association, Vol. VII, p. 104. 



THE PERIODICITY OF CRISES 

periodicity of crises was probably Sir William 
Petty. Walter Stanley Jevons, the English econo- 
mist, made this the foundation stone of his expla- 
nation of crises, and Bagehot, like Jevons, admits 
periodicity, urging that it is due to the influence of 
fluctuations in harvests upon the financial market. 
The same view is held by the Italian economist, 
Boccardo.^ The socialist writers who consider the 
crisis as an outcome of the individuahstic character 
of present production on the one hand, and of an 
unjust distribution of wealth on the other, which 
cuts off the buying power of the consumers as it 
increases the products depending on their demand, 
believe that crises will be periodic until the present 
industrial system is fundamentally changed. Such 
views are found in the writings of Marx, Rodber- 
tus, Friedrich Engels, and others. Writers like 
Wagner and Schaffle, who consider crises as due 
to the erection of a vast business structure upon 
a credit basis, consider the period of crises to 
depend upon the psychology of credit, and the 
length of time required to fabricate an overgrown 
credit industry. John Stuart Mill, in his theory of 
the tendency of profits to a minimum, puts forth a 
theory of crises which leads necessarily to the 
admission that their occurrence is periodic. He 
also said that the recurrence of crises might be 
due to the growth of certain tendencies of mind. 
Other exponents of the periodicity of crises who 

2 " Economia Politica," 6th ed., Vol. II, Part XXXV, p. 156. 



ECONOMIC CRISES 

agree in recognizing the fact, but differ in their 
explanations of its cause are Loehnis, Fregier, 
Juglar, and John Mills. 

That there is any evidence of periodicity has, 
however, been quite as distinctly denied by some 
writers as it has been affirmed by others. Roscher, 
recognizing as he does a great variety of causes of 
crises, considers the idea of periodicity unscientific. 
Emile de Laveleye denies the periodicity of crises.^ 
Mr. M. L. Scudder, Jr., in his "Congested Prices," 
tells us that the entire discussion of periodicity is 
due to a general tendency of the minds of investi- 
gators toward well-rounded and neatly subdivided 
portions of any study which group the facts 
into easily comprehended and, apparently, final 
relations. 

The best course, probably, is simply to set down 
the years of crises for the chief industrial states of 
the world, leaving to the reader to pass judgment 
on the evidence. But even the compiling of a list 
of crises is a difficult undertaking, since no precise 
line of demarkation can be drawn between general 
and partial crises, or between crises and other 
types of price fluctuation. 

8 E. de Laveleye, who is thoroughly familiar with the economic 
history of England as well as of France, says : " Crises return often, 
since the causes which produce them tend, as we have shown, to 
appear more and more frequently. But, as we have pointed out in 
our study, each crisis has its own peculiar determining causes, 
and does not result in a necessary manner from the periodic return 
of certain circumstances." — "La Marche Monetaire," Annexes 
XI, " De la Periodicite des Crises," p. 290. 
136 



THE PERIODICITY OF CRISES 



List of Economic Crises 



United States 


England 


France 





1792-93 





— 


1796 


— 


. — 


— 


1804 


— 


1810-II 


— 


I8l2 


— 


— 


— 


— 


1813 


— 


1815 




1818 


— 


1818 


1825 


1825 


1825 


— 


— 


1830 


1837-39 


1836-39 


1836-39 


1847 


1847 


1847 


— 


— 


185s 


1857 


1857 


1857 


— 


1866 


— 


1869 


— 


— 


1873 


1873 


1873 


— 


— 


1882 


1884 





1884-85 


1890 


1890 


1890 


1893 


— 


1893 



In this list there are embraced economic disturb- 
ances of heterogeneous character, such as have 
passed under the names of panics, or crises. There 
are included : crises due to failure of harvests 
(England, 1847); purely financial panics (United 
States, 1869); and disturbances originating in a 
single line of trade (England, 1836-39). The 

137 



ECONOMIC CRISES 

French list, which includes the crises enumerated 
by Juglar,* embraces a number of dates on which 
there was merely a trade depression, or a financial 
stringency of more or less consequence. 

In regard to the periodicity of crises, we have 
two principal theories to consider. It has been 
pointed out by those who are familiar with the 
part which the use of credit has played in bringing 
about certain crises, that crises in general must 
stand as far apart as the period required to build 
up a credit structure. If the attractions of credit 
which lead to its use, lead ultimately to its abuse, 
time must be given for this force to build up an 
overtowering structure, the destruction of which 
is the crisis. After the reverses of a crisis have 
warned the community of the dangers of unsound 
business, a stated lapse of time is required for 
business men to make the intellectual change 
necessary before the practices which lead to crises 
can again become common. Time is required to 
forget and to let hope gradually rise again, and 
the mind become busied in plans in which hope 
changes to confidence, and this as gradually blos- 
soms into rashness. The period of crisis will then 
be set, as J. S. Mill suggested, by certain peculiar- 
ities of the human mind, or as Wagner expresses 

* The list given in the text may be found in Juglar, " Des Crises 
Commerciales," p. 141. Juglar states that for the most part crises 
in France have fallen upon the same years as in England. Cf. 
" Crises Commerciales," in Say's " Nouveau Dictionnaire d'Econo- 
mie Politique," Tome I, Sec. i. 

138 



THE PERIODICITY OF CRISES 

it, by psychological law, in which an organic defect 
of human nature is betrayed. 

In the completion of this theory a suggestion 
originating from another quarter may be added. 
It has been maintained that the periodicity of 
crises rests upon the procession of economic gen- 
erations. The replacing of an older generation by 
a younger is continually going on in the business 
world, as elsewhere. It is held that in ten years 
after some trying experience the change in the 
personnel of business leaders will have been so 
great that the new men will be influential enough 
to permit a reappearance of dangerous practices 
such as the experienced generation, partly sup- 
planted, would not tolerate. This view does not 
imply that a new generation entirely replaces the 
old one every ten years; still less does it mean 
that at any particular time there is any unusual 
replacing of one generation by another. It simply 
asserts that in ten years not only will the keenness 
of the lesson of crises be somewhat dulled to those 
who have passed through the experience, but that 
the new leaders, untamed by this chastisement, will 
be so large a faction as to exert material influence 
in permitting dangerous practices to be adopted.^ 

A theory of crises, the foundation stone of which 
is the recognition of periodicity, is the " sun-spot 
and harvest" theory of Walter Stanley Jevons. 

6Cf. "The Nation," September 25, 1873, Vol. XVII, p. 207, 
and J. E. T. Rogers's article " Causes of Commercial Depression," 
" Princeton Review," Vol. Ill, N. S., p. 223. 

139 



ECONOMIC CRISES 

As its name indicates, the theory is devoted to an 
investigation of the relation between sun-spots, 
harvests, and economic crises. The idea was 
suggested by the striking coincidence in length of 
the period between the English crises of 1837, 
1847, 1857, 1866, and 1878 and the periodic varia- 
tion in the frequence of sun-spots. 

To ascertain what causal relation, if any, existed 
between these two sets of phenomena, Mr. Jevons, 
in 1862, undertook a series of investigations. He 
began with the study of certain annual trade fluc- 
tuations. The first to attract his attention was the 
influence of the '* quarter-day," at which time in 
England it is customary to settle accounts, pay 
rents, etc. Having calculated from the records of 
the Bank of England the effect of these settlement 
days, and taking the year as the period of study, 
a remarkably persistent set of annual fluctuations 
in the accounts of the bank was discovered, show- 
ing a distinct autumnal pressure upon the money 
market and the institutions of credit generally. In 
the fall of the year a considerable amount of money 
is paid out for harvest labor and in the purchase 
of harvests^ and the settlement of country and vil- 
lage accounts. This money is more than usually 
distributed into the hands of the people and hence 

6 Jevons, " Currency and Finance," pp. 1-12. The purchase and 
moving of American harvests has been found a matter of impor- 
tance in the history of American currency and banking. See 
Taussig, "The Silver Situation," pp. 14, 23, 67, 68, 89; also Sum- 
ner, " History of American Currency," pp. 217, 218, 219. 
140 



THE PERIODICITY OF CRISES 

abstracted from the banks. Expenditures previ- 
ously made in travel or for building have not yet 
returned to the banks, and the purchase of winter 
stocks requires money. The fall quarter-day is 
therefore an important date, for at that time rent 
and dividend payments at other times left on 
deposit are drawn from the banks for various uses. 
If at such a period as this the banks are not in 
excellent condition, or if for any reason an unusu- 
ally large demand is made for bank accommoda- 
tion, a breakdown of the credit system may occur, 
which, in the ignorance of the true nature of the 
excessive draft, may cause a sudden demand for 
liquidation and precipitate a crisis, or at least a 
financial panic. Since expenditure for subsistence 
represents about fifty per cent, of the ordinary 
person's expenditures, it can easily be seen that 
a rise or fall in the price of food will control the 
direction of a very considerable part of the pur- 
chasing power of society. An increase in the cost 
of food will withdraw the buying power upon which 
the prosperity of many lines of industry has rested. 
A decrease in the cost of food will release a large 
buying power, which, before the direction of its 
demand is known, will serve as a strong speculative 
influence." Nor need the fluctuations in harvests 
be great to generate considerable price fluctua- 
tions. Gregory King's tables on the relation be- 

7 Cf. Max Wirth, " Geschichte," 3d ed., pp. 5, 247; A, Wagner, 
"Zur Lehre von den Banken," p. 205; Rodbertus, " Meyer Briefe," 
Bd. I, p. 102. 

141 



ECONOMIC CRISES 

tween quantity and price fluctuations may be 
recollected in this connection. They show, for 
example, that to decrease the quantity of a com- 
modity by fifty per cent, would increase its price 
by more than fifty per cent.^ Finally, as the 
modern money market is organized, an unusual 
demand for cash may sometimes occasion serious 
consequences. In the words of Mr. Bagehot : 
" Any sudden event which creates a great demand 
for actual cash may cause, and will tend to cause, 
a panic in a country where cash is much econo- 
mized, and where debts payable on demand are 
large. In such a country an immense credit rests 
on a small cash reserve, and an unexpected and 
large diminution of that reserve may easily break 
up and shatter very much, if not the whole, of that 
credit."^ It was Mr. Jevons's idea that if the peri- 
odicity of sun-spots could be shown to have a 
counterpart in a fluctuation of harvests, and if this 
fluctuation of harvests through an unusual pres- 
sure on the autumnal money market could be 
shown to be the cause of crises, he would have 
explained the law of periodicity. More fully 
stated, the chain of reasoning which it was hoped 
to establish was as follows : A periodicity in the 
fluctuation of sun-spots has been clearly proven. 

8 Tooke, " History of Prices," Vol. I, pp. 12-14. In this con- 
nection Tooke enumerates as the three most important causes of 
fluctuations in prices, the effect of the seasons, war, and changes in 
the currency. 

» Walter Bagehot, " Lombard Street," Ch. VI. 
142 



THE PERIODICITY OF CRISES 

The periods of maximum appearance are separated 
by an interval of about 10,45 years. This period 
is within a fraction of the average lapse between 
the well-known English crises of 1837, 1847, iS57» 
1866, and 1878. This coincidence of periods 
raises something of a presumption that there is 
a causal connection between the two. There is a 
theory that numerous sun-spots indicate a greater 
activity upon the surface of the sun than exists at 
periods of minimum spots. This activity must 
influence the radiation of heat. If more heat is 
radiated at one time and less at another there will 
be a consequent variation in the amount of heat 
received by the earth. A period of relatively cold 
seasons, when less than the ordinary amount of 
light and heat is received, will be one of cloudy, 
wet weather, insufficient warmth for ripening 
crops, hence one of poor crops and relatively 
high prices for agricultural products. The suc- 
ceeding period, as influenced by fluctuations in the 
solar radiation, will be of opposite character, and 
so in succession each period will be followed by its 
opposite. 

The investigations of Mr. Jevons were for the 
purpose of proving whether or not the harvest 
cycle was marked enough in its influence on 
prices to justify the belief that it was the cause 
of the crises cycle. Early English price records 
were first examined by him, and although some 
sHght evidences of a periodicity in price fluctua- 
tion were obtained, no conclusions could be based 
143 



ECONOMIC CRISES 

upon them. The tables of merchandise exported 
from England to India also failed to give any testi- 
mony. In this connection the history of famines 
in India was examined, and a striking and signifi- 
cant periodicity was observed. ^^ Records of exports 
from Maryland and Virginia to England between 
1700 and 1770 exhibited periodic variations, though 
broken at one or two points. In the examination of 
the English records of this time, Mr. Jevons found 
that the South Sea Bubble and the crisis of 1721 
were exactly at the interval between the eleventh and 
twelfth sun-spot period, reckoning back from 1837. 
Studying carefully each period between these two 
dates, and registering every crisis year, as well as 
every year showing special commercial distress or 
unsound activity, Mr. Jevons constructed a list 
which certainly shows all that the history of Eng- 
lish crises can be made to prove for the theory of 
periodicity, and probably claims much more than 
that history, fairly interpreted, will justify. The 
list is as follows, unimportant business disturb- 
ances being indicated by a question mark : (1701 .''), 
171 1, 1721, 1731-32,(1742.? 1752.?), 1763, 1772-73, 
1783, 1793,(1804-5.?), 1815, 1825, 1836-39, 1847, 
1857, 1866, 1878. 

It must be very apparent to every one that an 

10 Jevons, "Currency and Finance," pp. 216, 236-238. Some 
testimony on this point is adduced by Mr. Cornelius Walford in his 
paper, " On the Famines of the World : Past and Present," pub- 
lished in the " Journal of the Royal Statistical Society " for Septem- 
ber, 1878, Vol. XLI, p. 521. 

144 



THE PERIODICITY OF CRISES 

argument of this sort is extremely liable to abuse 
unless in the hands of an unusually conscientious 
expert, and unless, also, a rigid criterion is adopted 
as to what may be allowed as constituting a crisis 
for the purpose of supplying a missing link in a 
series like the above. Even the best of reasoners, 
if once possessed of an idea of this sort, are liable 
to overestimate the importance of certain phenom- 
ena which help to prove their theories. The histor- 
ical proof must certainly be said to be inconclusive. 
The objections to this theory are both numerous 
and vital. In the first place there has been diffi- 
culty in the investigation of sun-spots, and uncer- 
tainty as to the sun-spot period. It was first 
calculated to be ii.ii years, but was later changed 
after more careful observation to 10.45 years. 
The facilities for accurate observation have been 
gradually improving so that modern records can- 
not be compared with the work of a former period 
without due allowance. Again, no substantial 
agreement has yet been reached among astron- 
omers regarding the cause of sun-spots ^^ and their 

11 Nathan T. Carr shows that neither Newcomb, Secchi, Faye, 
nor Young was able to hazard an explanation of sun-spots. The 
latter rejects the influence of planetary bodies, which theory is 
founded upon the coincidence of Jupiter's revolution with the ten- 
year sun-spot period, and to which Jevons referred. Carr considers 
sun-spots as periodic bursting forth of imprisoned gases, which, 
being steadily generated within the sun's mass, gradually increase 
pressure against the obstructions confining them. "The Sun; Its 
Constitution; Its Phenomena; Its Conditions," New York, 1883, 
Sec. 25. 

L 145 



ECONOMIC CRISES 

meteorological significance. It throws doubt upon 
the ten-year argument to know that if almost any 
other number of years is chosen, it can be shown 
to correspond with the price fluctuations in many 
tables. The French economist Juglar has noted 
cycles of five and six years in the accounts of the 
Bank of France.^^ Jevons himself says : " In 1875 
I made a laborious reduction of the data contained 
in Professor Thorold Rogers's admirable ' History 
of Agriculture and Prices in England from the 
Year 1259.' I then believed I had discovered the 
solar period in the prices of corn and various 
agricultural commodities, and I accordingly read 
a paper to that effect at the British Association 
at Bristol. Subsequent inquiry, however, seemed 
to show that periods of three, five, seven, nine, or 
even thirteen years would agree with Professor 

12 Juglar, "Journal des Economistes," 1856. Schaffle relies on 
Juglar in saying that every six or seven years a general liquidation 
appears to be necessary in France, in order to allow trade to enter 
upon a new period of growth. Roscher, *' Ansichten," Bd. II, 
p. 381, mentions on the authority of Fregier that crises occur in 
France every three or five years. 

All these contradictory statements most effectually dispose of one 
another. Concerning English conditions Friedrich Engels has tes- 
tified as follows in the introduction to his work, " The Condition of 
the Working Classes in England in 1844," pp. x, xi: "The recur- 
ring period of the great industrial crises is stated in the text as five 
years. This was the period apparently indicated by the course of 
events from 1825 to 1842. But the industrial history from 1842 
to 1868 has shown that the real period is one of ten years, that the 
intermediate revulsions were secondary, and tended more and more 
to disappear. Since 1868 the state of things has changed again . . ." 
146 



THE PERIODICITY OF CRISES 

Rogers's data just as well as a period of eleven 
years ; in disgust at this result I withdrew the 
paper from further publication." ^-^ A further com- 
plication attends from the fact that there are other 
climatic periods, that these price investigations 
gave evidences of larger price cycles, and that the 
records of sun-spots vary not only in a short cycle 
of years but through a much longer one. From 
observations made upon glaciers, geographers have 
noted a climatic period of about thirty-five years. 
The maxima of these climatic periods have fallen 
in the years 1767, 18 14, 1840, in neither of which 
there has been a crisis. In regard to a larger 
sun-spot cycle, Professor Balfour Stewart says : ** It 
appears that these eleven-yearly oscillations are 
not always of the same magnitude ; sometimes 
they are large, and sometimes small. They were 
probably sm.all about the middle of the last cen- 
tury, becoming large toward the end of it; they 
were again small about the early part of the 
present century. They have recently been large, 
and we may suspect that in the future there will 
again be a falling off." This corresponds with 
the conclusions of Carrington, as shown in the dia- 
grams pubhshed in his " Observations of Solar 
Spots." 

Another objection to this theory is the lack of 
proof that sun-spots exert an important determina- 
tive influence upon climate. Sir William Herschel 

18 « Currency and Finance," p. 225. 
147 



ECONOMIC CRISES 

said : " I think we may reasonably conclude that 
there must be a manifest difference in the emission 
of light and heat from the sun. . . . With regard 
to the contemporary severity and mildness of the 
seasons, it will hardly be necessary to remark that 
nothing decisive can be obtained." ^^ Considering 
the distribution of land and water masses on the 
earth, the effect of the declination of the earth's 
axis, of nearness or remoteness to the equator, of 
mountain chains, variations in the soil and its 
vegetable covering, the prevailing directions of 
the winds and other atmospheric phenomena, it 
is not a simple thing to say what the effect of a 
given variation in the amount of heat radiated 
to the earth would be upon the climate of any 
country. The effect of an increase in the solar 
heat received during a summer might improve the 
harvests of England, but diminish those of Egypt.^^ 

1* "Philosophical Transactions of the Royal Society for 1801," 
Vol. XCI, p. 310. 

15 " It is very probable that the excess of sunshine which pro- 
duces drought and famine in India has an opposite effect on the 
prosperity of England and all other countries lying between the iso- 
thermal lines, and that the more moderate degree of sunshine 
which may suit the Indian cultivator is insufficient to properly 
ripen English wheat and other produce (oats excepted)." — Mr. 
John Kemp, in "Commercial Crises and Sun-Spots," "Nature," 
December 5, 1878, Vol. XIX, p. 97. A reciprocal climatic relation 
between countries and in connection with sun-spots is indicated by 
some barometric records. See article " On the Barometric See- 
Saw between Russia and India in the Sun-Spot Cycle," in " Na- 
ture," March 18, 1880, in which Mr. H. F. Blanford makes the 
following statement : " There is a reciprocating and cyclical oscilla- 
148 



THE PERIODICITY OF CRISES 

Mr. Jevons himself admitted that changes due to 
solar radiation would have little or no traceable 
influence upon the complicated climate of Europe. 
At least no success has been attained in showing 
periodicity in the variations of the price of either 
European or English grain for recent times. These 
considerations suggest that if the climates of various 
regions of the earth are in any degree reciprocal, 
the modern growth of the means of transportation 
has so expanded as to distribute the surplus of 
abundantly supplied areas over those less well sup- 
plied and neutralize price fluctuations which might 
otherwise result. The principal European markets 
receive wheat from all parts of the world and dis- 
play great stability of prices. This equalizing 
effect of commerce has been greatest during this 
century, but it is precisely during this century that 
economic crises have been most acute and most 
steadily recurrent. 

We may still further object to the sun-spot 
theory, not only that the sun-spot phenomena are 
imperfectly understood and that their relation to 
climate remains to be defined, but that the relation 
between variations in harvests and crises is not 
more satisfactorily explained than any of the other 

tion of atmospheric pressure, of such a character that the pressure 
is at a maximum in Western Siberia and Russia about the epoch 
of maximum sun-spots, and in the Indo-Malayan area at that of 
minimum sun-spots." But this idea of reciprocal relations cannot 
be safely pressed very far. See E. Reclus, " The Earth and its 
Inhabitants; North America," Vol. Ill, "The United States," 
p. 254. 

149 



ECONOMIC CRISES 

steps in this chain of influences. We are told on 
the one hand by Jevons that abundant harvests 
have often aroused a speculative spirit as the result 
of prosperity and have led to ill-advised business 
activity and eventually to crises. On the other 
hand, the English crisis of 1847 is included by 
Jevons among others upon which he places reliance 
to found his periodical series. This disturbance 
was brought on, however, in part by harvest fail- 
ures which compelled England to send her gold 
to the United States for provisions. This drain 
of gold under the working of Peel's Bank Act 
caused a stringency of the money market. The 
harvest theory appears to be holding to both horns 
of the dilemma. 

Finally the incidence of crisis years and of maxi- 
mum or minimum sun-spot years is not identical. 
The investigations of Schwabe showed that the 
years of maximum sun-spot frequency were 1828, 
1837, 1848, i860, and 1871. The minimum years 
were 1833, 1844, 1855, 1867. But during this period 
the English crises fell, as we have already seen, 
in the years 1825, 1836-39, 1847, 1857, 1^66, 1873. 
The series of crises as it stood some years ago pre- 
sented more of a foothold for an argument con- 
cerning periodicity than it does at the present time, 
since the last two or three crises, both in England 
and the United States, have broken up the rather 
remarkable rhythmic succession of the earlier part 
of the series. As President A. T. Hadley has said, 
" The Civil War in the United States quite broke 

150 



THE PERIODICITY OF CRISES 

up the regular ten-year round of crises, and, as it did 
not have any appreciable effect on the sun-spots, 
it may be said to have broken up the theory also." ^^ 
But even if the character of the crises prior to this 
most recent period be considered with care, it will 
be seen that while a harvest theory might help to 
explain the occurrence of some disturbances, its 
application to others is absurd. One might per- 
haps admit some proof in connection with the 
English crises of 1825 or 1847, or the American 
crises of 1836-39, but how shall the international 
crises of 1857 and 1873 be explained .? The har- 
vest theory is inapt as an explanation of the appear- 
ance of John Law and the insane hopes built upon 
prospects of colonial trade which led to the crisis 
of 1720. This theory does not apply to the Eng- 
hsh crisis of 18 15 which hung upon the termination 
of the Napoleonic wars, nor to the financial situa- 
tion in London in 1866. It affords no explanation 
of Black Friday in 1869, nor of the Baring and 
Copper Syndicate failures in 1890, and it does not 
account for the crisis of 1893. 

RESUME 

I. Theories of crises have been suggested by the fact that 
crises are distributed with a certain uniformity of 
interval. 
II. Intermittent character of social phenomena. 
Due to the seasons. 
Periodic reforms. 

16 Johnson's "Universal Cyclopgedia," article ** Commercial Crises." 



ECONOMIC CRISES 

Settlement of western America. 
Table of crisis years. 

III. Periodicity of crises and credit. 

The gradual expansion and final overgrowth of credit. 
Replacement of generations of business men. 

IV. " Harvest and Sun-Spot " theory. 

Influence of the quarter-day. 

Theory of the influence of sun-spots. 

Mr. Jevons's futile search for periodic price fluctuations. 

His list of crisis years. 

Objections : Apparent existence of numerous price 
cycles ; no correspondence between crisis years 
and years of maxima or minima sun-spots ; com- 
plexity of climate and the equalization of prices 
through commerce. Recent crises have broken 
the regular succession of some earlier ones. 



152 



CHAPTER VIII 

CREDIT AND SPECULATION 

One of the most constant characteristics of the 
pre-crisis period is an abnormal extension of credit. 
It is significant that historically the appearance of 
crises is practically simultaneous with the growth 
of our present system of credit economy. The 
distribution of crises between nations also corre- 
sponds with the extension of the use of credit. 
Credit creates between the members of industrial 
society an economic bond of primary strength, 
making the uncertainties which influence one party 
of vital concern to every other. The relations of 
debtor and creditor in modern society have been 
likened to the life cords used to bind together a 
company of mountain tourists. It is certain that 
at least in times of distress credit and money are 
those agencies of the market which make men 
reahze the economic interpretation of the' saying, 
" For none of us liveth to himself, and no man 
dieth to himself." ^ 

Credit serves to separate by an interval of time 

- Romans xiv. 7. In 1844 Joseph Mazzini said, "Credit nowa- 
days is no longer a national, but a European, institution." It may 
now be considered a world institution. 



ECONOMIC CRISES 

the two parts of a complete act of exchange, and 
it serves to hold the market in a state of suspense 
as to what the effect of the postponed part of the 
transaction will be, or, indeed, whether the transac- 
tion will ever be completed or not. In the balancing 
of demand and supply, particularly with reference 
to money, this uncertainty in the element of time 
is a very important consideration. The economist 
Roscher has shown that in a money and credit 
economy, demand and supply cannot be looked 
upon merely as two sides of the same thing, as 
some writers have asserted.^ 

The transfer of money or money's worth, facili- 
tated by credit, involves the confidence on the part 
of the creditor that the debtor is able and willing 
to repay the loan and to execute in a proper man- 
ner whatever other conditions are agreed upon or 
implied. It is true that in many forms of credit 
transactions specific evidences of indebtedness are 
created and certain rights and titles to property 
are given the creditor to afford a partial basis for 
his confidence, but considering the methods by 
which business is usually transacted, it is obvious 
that a large portion of credit transfers rest chiefly 
upon personal security ; in short, upon probity or 
honor. The effect of such transactions is as vari- 
ous as the circumstances under which credit is 
granted and the character of the parties involved. 
As language will serve to convey the noblest or the 

2 Roscher, " Ansichten," Bd. II, "Zur Lehre von den Absatz- 
krisen," Sec. 3. 



CREDIT AND SPECULATION 

basest of thoughts, so credit will serve to enhance 
or diminish the economic well-being of the users. 
The effects of credit vary as the uses to which the 
wealth transferred is put. It has been called the 
highest triumph and the ** shadow-side " of modern 
culture. As Lorenz von Stein has said, it resembles 
the press in the world of thought, aUke a minister 
to good and evil. 

The widespread growth of the system of credit 
is ample evidence that it performs useful services. 
It is usually thought an advantage to be able to 
transfer capital easily into the hands of those 
desiring to use it. Industry is certainly rendered 
more efficient by whatever facilitates the placing 
of capital in the hands of those best fitted to 
manage and employ it. But in so far as crises 
may be considered the result of unwise credit, 
they may be looked upon as evidence that capital 
does not through credit seek out with sufficient 
certainty the ablest managers. It is the law of 
nature that a man shall go through the educat- 
ing and subduing process of earning wealth before 
bearing the responsibility of its management. 
How far we can safely suspend this law is a 
question. Credit increases in some persons the 
desire to save by affording in advance an easy 
solution of the question of investment. It pre- 
vents wealth which is saved from being hoarded 
and gives industry the largest proportion of the 
sum saved. Credit assembles small savings to 
make up the amounts necessary to carry through 
155 



ECONOMIC CRISES 

great undertakings. When it is said that credit 
facilitates the transfer of values, it is implied that 
it saves the use of money. Adam Smith said that 
if money serves as a highway of trade, credit may 
be likened to a highway through the air which 
permits the release of a portion of the precious 
metals for other uses.^ It also saves the time, 
trouble, and expense which would otherwise be 
necessary to make separate and complete pay- 
ments in every business transaction. 

The dangers and abuses which have connected 
themselves with credit have by no means escaped 
the attention of economic writers who have given 
attention to crises. John Stuart Mill and Adolph 
Wagner have so far emphasized the part played 
by credit as to favor the use of the phrase " credit 
crises." Schaffle, Michaelis, Von Mangoldt, Fliir- 
scheim, and Von Stein, together with Juglar in 

8 By these means it increases the amount of disposable capital. 
Von Stein makes the growth of credit the last and real ground of 
commercial crises. He says : " The causes of commercial crises lie 
in the causes which check payments. As payments result from 
sales, a lack of sales is the first cause of crises. The cause of a 
lack of sales lies in the fact that production suddenly outruns con- 
sumption, because of which naturally a portion of the product 
remains unsold. The cause of this sudden increase of production 
lies in the rapid increase of productive capital, and since this is 
occasioned by credit, the rapid increase of credit, interest not 
being considered, is the cause of commercial crises. Credit, as it 
is the source of progress, is also the source of danger. It is in the 
economic world what the press is in the world of thought. No- 
where is the good more closely connected with the evil." — " Lehr- 
buch der Volkswirthschaft," p. 228. 

156 



CREDIT AND SPECULATION 

France and Macleod in England have pointed 
out the sensitiveness of credit and have indicated 
some of its prevalent abuses.* 

To understand the dangers inhering in the use 
of credit it is necessary to observe the sensitive- 
ness of the instrument. Depending as it does 
upon confidence, it is as changeable as the course 
of public thought.^ Credit facilitates a system 
of exchanges which money is incapable of main- 
taining unaided. The extension of credit is ac- 
companied by a realization that if any large part 
of the mechanism of trade should meet with' 
disaster capable of shaking confidence, the result 
would be the withdrawal of credit and a conse- 
quent stringency in the money market. A ner- 
vous watch is therefore maintained for such 
occurrences, and the dread of the headlong rush 
for liquidation, in which some must inevitably be 
crushed, always lurks in the background of modern 
industry.^ 

* Few writers deny that important connections exist between 
crises and credit and speculation. Those writers who hold the 
Rodbertus theory of crises tend to deny or minimize these connec- 
tions, however. See Theodor Hertzka, " Die Gesetze der socialen 
Entwickelung," Bd. I, Ch. VIII, pp. 95-106. 

5 Cf. Bagehot, " Lombard Street," " Complete Works," Vol. V, pp. 
182-183. O^ P- 48 he says, " Every banker knows that if he has 
to prove that he is worthy of credit, however good may be his 
arguments in fact, his credit is gone," See also " Mechem on 
Agency," Sec. 209, p. 136, Detroit, 1888. 

^ A description of unsound credit so neat and delicate as to 
scarcely admit of translation is given by Schafifle in the following 
words : " Ein Kreditgebaude muss sich in die Luft zimmern, so 



ECONOMIC CRISES 

The specific circumstances which may lead to 
the destruction of credit are innumerable. Credit 
may be called upon to procure the means for 
unproductive and unwise consumption ^ or for the 
carrying through of reckless schemes of produc- 
tion. The more sudden the demand for capital, 
the more certain it is that the demand will be 
accommodated through credit instrumentalities. In 
so far as credit brings savings to investment, it 
lessens the reserve funds both of money and com- 
modities which remain unentangled from the 
productive mechanism and which may be drawn 
upon in case that mechanism falls into disaster. 
It is said that capital lengthens the act of produc- 

leicht, dass ein Windhauch es endlich zusammen blasen kann. 
Geht ein einziges Glied aus der Fuge, so stiirzen alle anderen, 
bleibt eine Zahlung aus, findet nicht ganz genau der kalkulierte 
Absatz zur kalkulierten Zeit und zum kalkulierten hohen Preise 
statt, so fallt dann mit einem Ringe die ganze papierne Kette 
auseinander." — " Gesammelte Aufsatze," Bd. II, p. 26, 1886. 

■^ Bagehot points out that the borrowing of spendthrifts is in- 
significant compared with the entire amount of credit transfers. 
Spendthrift borrowing, he says, is now only likely to occur, on any 
great scale, in public finance. " Complete Works," Vol. V, p. 438. 
For the opposite view, that frivolous expenditure is less likely to 
occur in public than in private finance, see Cohn, " Finanzwissen- 
schaft," pp. 182-185. This discussion seems to hinge on how war 
expenses are classified. Bagehot cites the expenses of the Seven 
Years' War to France. Held says that war expenses can only 
be considered unproductive from a purely economic standpoint. 
" Kredit," in Bluntschli's " Staatsworterbuch," Loning ed., Bd. II, 
p. 424. Wagner attempts something of a justification even upon 
economic grounds. " Finanzwissenschaft," 3 Aufl., Bd. I, pp. 73, 
416-418. 

158 



CREDIT AND SPECULATION 

tion and renders it more roundabout. In so far 
as credit facilitates the use of capital, it assists in 
lengthening the forecast of the market which 
producers must make, and so increases uncer- 
tainty while it multiplies the number of interests 
involved in every transaction. 

The realization of the force of coming obliga- 
tions is always more indistinct the more distant 
they are in the future. It is partly because they 
believe that patrons will buy somewhat more 
liberally when buying "on account" that mer- 
chants consent to be harassed with the costly 
and annoying "credit" system. Because of this 
inability to realize fully the future, the chattel- 
mortgage, lightning-rod shark of the past was tol- 
erated and the instalment plan now proves a means 
of extortion in dishonest hands. It is a well-known 
fact that while strikes against a reduction of wages 
are frequent, laborers can seldom be united to 
strike against unhealthful conditions which do 
not indeed reduce wages for the moment, but 
which mean future loss in sickness and hastened 
decrepitude. The public shows itself relatively 
indifferent in regard to the expenditure of funds 
which are provided by the creation of public debt, 
the redemption of which is placed in the indefinite 
future.^ There is a false feeling of opulence 

8 Mr. Albert S. Bolles well says, " Nothing ever chills the desire 
to spend money, especially for the benefit of the public, so quickly as 
an immediate demand for it." — Lalor's "Cyclopaedia," " Finance," 
Vol. II, p. 187. 



ECONOMIC CRISES 

attending the removal of one's obligations to the 
future. The borrower has to deal with an instinc- 
tive feeling that as the result of his transaction 
he has in some way made a gain which will per- 
mit of a little carelessness or generosity. The 
force of this may in an individual instance be 
great or small, but the widespread use of credit 
makes even the minor characteristics of borrowing 
important, if they can be shown to be constant. 

Credit should be granted for short periods only, 
even if often renewed. Long credits work a grad- 
ual insensibility to the idea of obligation and lead 
to practices not harmonious with the position of 
a debtor. Punctuality, one of the most funda- 
mental of economic virtues, is in any industrial 
community largely regulated by the practice of 
the banks. " It may not be true that punctuality 
is the parent of all virtues ; but unmistakably is 
procrastination the mother of every vice, whether 
in social or personal character. There is nothing 
for making duty easy like bringing men sharply 
up to it, and firmly holding them there. On the 
other hand, obligations grow heavier and heavier 
the longer they are put off. What was first pro- 
crastinated, it is soon sought to evade ; self-respect 
wilts under the reproaches of the creditor; dis- 

On the general topic of the realization of distant results, see 
Spinoza, "Ethics," Propositions IX and X. For the application to 
economics, see Bohm-Bawerk, " Positive Theory of Capital," Bk. V, 
Ch. I, "Present and Future in Economic Life," and Ch. Ill, 
" Underestimate of the Future." 

i6o 



CREDIT AND SPECULATION 

honest suggestions arise unrebuked in the mind 
that would once have thrust them indignantly out. 
The advantage which the bank confers on the com- 
munity by introducing a rigid standard of punctu- 
ality cannot be overrated."^ 

It need not be pointed out that in the case of 
advances of money which rest upon honesty and 
business reputation, precaution has to be con- 
stantly taken against men who are without means 
and are willing to put money obtained by credit 
to unusual risk, the loss of which they could not 
be compelled to make good, since the profits, if 
any, can be retained. A materialistic age places 
strong inducements before the ambitious to make 
a dash for wealth, in spite of the fact that the 
game is often simply the dishonest one of " Heads 
I win, tails you lose." The voice of public opin- 
ion is rendered equivocal on such matters by call- 
ing those exceptional ones who succeed by these 
methods ''smart," and by giving prestige to wealth 
regardless of its origin. With a loan the creditor 
buys an interest in the debtor's ability and moral 
character, and the motto caveat emptor is as much 
more significant in such transactions than in ordi- 
nary buying as character and ability are more dif- 
ficult to judge than goods. Loans made at the 
average rates of interest contemplate only the 
average difficulty of collection. If the loan is one 
of the transient kind made in the course of busi- 
ness, without security, justice would seem to de- 

^ F. A. Walker, " Money, Trade, and Industry," p. 252. 
M 161 



ECONOMIC CRISES 

mand extraordinary caution on the part of the 
debtor not to disable himself for meeting his 
obligations. 

The chief credit institution of modern society is 
the bank. When crises have been thought to be 
due to the misuse of credit, nothing has been more 
common than at once to fasten the guilt upon the 
banks and condemn this or that feature of the 
prevailing bank system. The mistake of many 
writers upon crises has been to confine attention 
too narrowly to some one form in which the abuse 
of credit manifests itself. A comparative study of 
crises will show that they occur under the most 
varied systems of banking and currency.^^ Banks 
are the servants of trade and are subject to the 
same influences which affect it. The abuses con- 
nected with credit which fasten attention upon 
banks, and which inflict upon them the greatest 
injury, are not always nor yet generally due to 
circumstances connected with the banking system 
itself.ii 

A rising credit should rather be considered like 

^^ " The possibility of overspeculation is correctly referred to 
the misuse of credit, but again and again will the common mistake 
be made of pointing out some one particular form of the use of 
credit and some one particular sort of credit institution as the sole 
cause of overspeculation and the abuse of credit." — Wagner, in 
" Rentzsch," " Handworterbuch," p. 533. 

11 Speaking of the misuse of banking institutions, Horace White 
says : " Excessive issues and excessive credits are invariable con- 
comitants of the swelling gale of prosperity which precedes and 
ushers in a crisis. They are part and parcel of the speculative 
fever which pervades the community, but are no more to be ac- 
162 



CREDIT AND SPECULATION 

a rising tide the pressure of which breaks through 
an only too weak wall of moral restraint. At one 
place the abuse of credit may centre in the bank- 
ing policy, at another in joint stock companies ; at 
one time it may be a fault in the bankruptcy laws, 
and at another it may be a reckless issue of paper 
money. To patch the crevices of industrial legis- 
lation, as new experiences show new defects, is 
indeed necessary and is valuable as far as it goes, 
but it does not kill the central evil nor prevent it 
manifesting itself in ever new forms. 

The use of credit has proven especially danger- 
ous in times when, owing to some gratifying 
circumstance, the tone of business is unusually 
optimistic. It has also proven dangerous in lines 
of trade in which trade estimates are unusually 
speculative and results are uncertain. The history 
of mining, invention, and foreign trade is replete 
with failures partly due to easy credit. 

To prevent the growth of unsound business, it 
behooves every giver of credit to maintain a sharp 
scrutiny of the conditions under which it is given. 
Credit, like esteem, is to be given only to the virtu- 
ous. Backbone is quite as necessary in the cred- 
itor to enable him to say no, as in the debtor to 
enable him to resist the temptation to risk dishon- 
estly the possessions of another. It is true that 
the force of competition presses upon the creditor, 

counted the cause of it than the excessive multiplication of spindles 
and of railways going on at the same time." — " Commercial Crises," 
in Lalor's " Cyclopaedia," Vol. I, p. 525. 
163 



ECONOMIC CRISES 

whether an individual or a bank, to compel unwise 
accommodation, but in the same way that labor 
should resist the tendencies leading to the de- 
basement of the standard of life, so should capi- 
tal resist the tendencies working to debase the 
standard of credit. An unwise credit is like an 
unwise charity, full of ill consequences for all par- 
ties involved. As with everything else, credit 
easily gotten is lightly prized. The first credit 
operations of a series should always be most 
closely scrutinized, as they tend to compel suc- 
ceeding advances through the force of courtesy 
or business connections. Business accommodation 
and business standing once granted are not lightly 
to be broken off or ruined. The situation com- 
pelling it js to be avoided by merchants and 
banks desirous of escaping costly and disagreeable 
antagonisms. ^2 

Whatever agencies facihtate the accurate esti- 

12 " A banker may have a very shrewd suspicion that his cus- 
tomer is overtrading, but, as he has no access to his customer's 
books, it may be very difficult for him positively to ascertain the 
fact. And if a banker acts upon insufficient grounds, and v^ithout 
sure cause ruins his customer, he will get himself into very bad 
odor, and may do himself much injury. Of course, the greater the 
merchant, the more difficult it is to deal with him. And great mer- 
chants who have numerous and powerful connections can manu- 
facture bills to an incredible extent to cover up losses, and keep 
themselves afloat by extracting fresh funds from their bankers to 
speculate with; until, when the final collapse comes, it is found 
that their assets are almost all eaten away, and left perhaps a shil- 
ling or two in the pound to meet the masses of paper." — MAC- 
LEOD, "The Theory of Credit," Vol. II, Ch. XVI, Sec. 4, pp. 709-710. 
164 



CREDIT AND SPECULATION 

mation of character and financial standing render 
a useful service in directing credit. Such are 
banks, mercantile agencies, trade lists, collection 
agencies, business men's protective associations, 
and the like. Credit implies trust, and what is 
necessary for that is realized when we say " trust- 
worthiness." It means a great deal that the 
characteristics of modern business are such as 
increasingly to demand honesty and impose that 
as the condition of all success on a large 
scale. 

The modern growth of credit has for the first 
time made speculation socially dangerous. When 
we consider speculation in its broadest sense, we 
have not simply to do with the activities of stock 
exchange *' operators," but with a necessary tenta- 
tiveness of judgment affecting in some degree 
every human calculation. That sort of specula- 
tion which is merely a rational provision against 
future contingencies, all understand and appreci- 
ate. Adam Smith has pointed out that speculative 
returns constitute a part of all wages, especially of 
those in the higher occupations where considerable 
risk of failure has been run. Although specula- 
tion involves the presence of uncertainty, it seems 
desirable to distinguish it from gambling or oper- 
ations on a basis of pure chance. Gambling has 
only the evils and none of the virtues of specula- 
tion. Throwing patient industry to the wind, it 
fascinates those who engage in it by an unending 
series of shallow uncertainties and thoughtless sur- 
165 



ECONOMIC CRISES 

prises fit to tickle the feeble wits of savages and 
degenerate types of the human family. 

It would promote business integrity and pre- 
cision in ethical judgments to distinguish between 
speculation and gambling. A clear distinction 
would remove from gambling the protection now 
afforded to it by confusion with certain forms of 
speculation which are useful and honorable. The 
existence of gambling is of relatively minor impor- 
tance for crises. The grasping and dishonest 
spirit which draws on the crisis is of too calcu- 
lating a nature to be long absorbed with what 
remains persistently within the realm of chance. 
An absolute distinction cannot be made between 
speculation and gambling. Both deal with chance. 
Chance is merely a name by which we designate 
causes when they are too subtle and complex to 
be understood and followed by human reason at 
present. It does not imply the absence of causes. 
Hence the realm of chance is lessened by every 
fresh acquisition of the human intellect. The 
gambler accepts the results of chance as final and 
inexplicable and allows them to amuse or excite 
him. Speculation is characterized by a constant 
and strenuous endeavor to penetrate the riddle of 
chance and to discover some clew by which to read 
the future. It is suggestive at least that the word 
" speculation " is commonly used not merely to 
indicate "the investing of money at a risk of 
loss, on the chance of unusual gain," but to 
signify profound meditation or the "deep and 
i66 



CREDIT AND SPECULATION 

thorough consideration of a theoretical ques- 
tion." 13 

The chief service which is performed by specu- 
lation is in connection with the study of uncertain 
conditions. So long as the results of the best esti- 
mates in regard to certain business contingencies 
are more than usually uncertain, we speak of them 
as speculative, and transactions based upon these 
contingencies are speculations. The tendency of 
speculative estimates is to become more and more 
accurate. In this way the influence of speculation 

1* " Century Dictionary." 

Cohn says : " Speculation is not merely, as Lassalle asserted, * a 
guess as to the results which unknown circumstances will cause.' 
It is more than that. It is the warfare of intelligence, equipped 
with the knowledge of known forces, against the barbaric dominion 
of chance." — " Finanzwissenschaft," p. 463. And Bowen, " Specu- 
lation then, as McCulloch remarks, ' is only another name for 
foresight.'" — "Principles of Political Economy," p. 429. This 
corresponds with the view of P. J. Proudhon, who enumerates four 
factors of production, namely : labor, capital, commerce, and specu- 
lation. Of the latter he says : " Speculation is nothing else than 
the intellectual conception of the different ways in which labor, 
credit, transportation, and exchange can unite in production. It is 
speculation which discovers riches, which invents the most eco- 
nomic means of securing them, and which multiplies them by new 
forms or combinations of credit, transportation, circulation, and 
exchange, by creating new wants or by the incessant redistribution 
of fortunes." — "Manuel du Speculateur k la Bourse" (Paris, 1854), 
p. 54. Compare Adam Smith, " Wealth of Nations," Bk. IV, Ch. 
V, after the heading " Digression concerning the Corn Trade and 
Corn Laws," Sees. 7 and 8. See also Spencer, " Social Statics," 
abridged ed., p. 104. J. S. Mill gives an excellent account of 
the useful office of speculation when it is confined in proper chan- 
nels. " Political Economy," Bk. IV, Ch. II, Sec. 5. 
167 



ECONOMIC CRISES 

is to carry the object of its calculations over into 
the field of ordinary certainty, while the speculative 
spirit is led on to attempt the prediction of ever 
more complex and uncertain phenomena. The 
hazard money placed on the life of sailors in the 
seventeenth century, though at first little better 
than gambling, led to the formation of life tables 
and the founding of life insurance, than which few 
industrial enterprises are now more certain. The 
effect of true speculation is to eliminate itself. A 
fundamental part of the struggle of civilization is 
to lessen the domain of chance and to extend the 
field in which we can operate intelligently. A 
part of the advance guard in this struggle are the 
better elements engaged in speculative enter- 
prises.^* But in the field of business uncertainty, 
as in the shadow land of science, there are found, 
side by side with honest investigators, those 

1* F. A. Lange has thus spoken of the effects of the better sort 
of speculative enterprise : " Speculation, though in the first place 
pursuing its own interests, has so greatly contributed to provide 
Europe with the means of communication, to regulate commerce, 
to give more solid and real character to business, to keep down the 
rate of interest, to extend and consolidate credit, to limit usury, to 
make fraud more uncommon, that no prince, no minister, no phi- 
losopher, no philanthropist, actuated by the principle of self-deny- 
ing activity, of benevolent instruction, of wise legislation, could 
exert anything like the same influence that has been exercised by 
the gradual removal of the barriers that opposed themselves to the 
free activity of the individual in the feudal arrangements of the 
Middle Ages." — "History of Materialism," 2d ed. (Boston, 1879- 
81), Vol. Ill, Sec. 4, Ch. I, p. 252. Similar statements are made 
by Wagner in " Rentzsch," " Handworterbuch," p. 530. 
168 



CREDIT AND SPECULATION 

who succeed by bold dishonesty and cunning in- 
trigue. 

Speculation in its proper sphere tends directly 
to prevent fluctuations in price by anticipating 
events. It softens the intensity with which eco- 
nomic forces work by lengthening the time over 
which their influence extends. Speculation en- 
forces present economy in the face of probable 
future want, and so has been called the best pre- 
ventive of famine. It permits present plenty in 
the prospect of future abundance, and thus avoids 
waste and extravagance. It evens supply both 
chronologically and geographically, and so directs 
the energies of production as to achieve the maxi- 
mum of ease and certainty afforded by the circum- 
stances governing the economic Hfe.^^ 

It may therefore be clearly understood that all 

^^ Lexis defines speculation as follows : " The objective purpose 
of speculation is an estimate of the probable future conditions of 
the market, made for the purpose of guiding to the best purpose 
the movement of goods." — Schonberg's "Handbuch," 2d ed., 
Bd. II, Ch. XXI, Sec. 46, p. 727. 

In agreement with this Michaelis further develops the idea : 
" Knowledge of the future is profitable for trade, and is of supreme 
importance for the public good. To secure this profit and advan- 
tage is the aim of speculation. If the common investigation, the 
working together of human instincts and human minds which is 
brought about in speculative trade, did not find place, all investment 
of capital and all trade would take on the character of a game 
of chance." — Faucher's " Vierteljahrsschrift," Bd. IV, pp. 171, 172. 

In public finance the effect of speculative estimates is gradually to 
change extraordinary into ordinary expenses. Cf. Cohn, " Finanz- 
wlssenschaft " (Stuttgart, 1889), p. 189; also Bastable, "Public 
Finance," pp. 124, 125. 

169 



ECONOMIC CRISES 

that class of operators whose influence upon the 
market is to increase or prolong fluctuations of 
market prices and render conditions less rather 
than more dependable, deserves no good name. 
They are market brigands. 

The perverted forms of speculative activity are 
exceedingly dangerous to the credit institutions of 
modern business. The uncertainty which inheres 
in all speculative transactions is the fundamental 
element of danger in them which makes it neces- 
sary to guard carefully the delicate mechanism of 
credit, dependent as it is upon confidence, from 
close alUance with them. The connection of the 
banks of New York with the stock market, through 
investments made in call loans secured by deposits 
of stock-exchange securities made by brokers, has 
several times proven dangerous. An editorial in 
the " Washington Post," some time since, affirmed : 
*' There is a growing demand for the old-fashioned, 
stingy banker, who is not disposed to be accommo- 
dating." It may perhaps be said that our banks 
could safely be more liberal in the period immedi- 
ately succeeding a crisis and more conservative in 
" prosperous times," when the crisis of eight or 
ten years back has been forgotten. 

To this uncertainty which characterizes spec- 
ulation, there must be added the tendency of 
human nature to overestimate its ability to pre- 
dict and its power to control the market. Adam 
Smith remarked upon the overweening confi- 
dence in their own abilities possessed by the 
170 



CREDIT AND SPECULATION 

majority of men. This observation upon human 
nature finds an important application in specula- 
tion. It is a blind confidence in one's ability to 
read the markets that furnishes the " lambs " of 
the stock exchange. The same weakness from 
time to time brings down the most expert oper- 
ators. This optimism and intellectual pride is 
most inopportunely thrust into prominence at those 
junctures where caution is most desirable, viz. in 
dealing with uncertainties. 

It is asserted by operators that they merely back 
their own opinions and that they take advantage 
of the conditions of the market, but do not create 
them. It is claimed that it is a result of the prin- 
ciple of the division of labor that the study of the 
conditions of the market is carried on by a dis- 
tinct body of men and thus a necessary task is 
systematically performed. ^^ No occupation can be 
justified which does not render a social service. 
Much of the work of the stock market is use- 
ful and justifiable. But the justification of the 
principle of speculation does not excuse many 
questionable practices which have become very 
generally connected with it. Dealings in ** fu- 
tures,'* and dealings in which no real delivery is 
ever contemplated, and transactions in which the 
sums deposited are so small a proportion of the 
total values involved that vast personal interests 
are made to hang upon shght fluctuations in the 

IS Spencer, "First Principles" (New York, 1873), p. 479. Mi- 
chaelis, in Faucher's " Vierteljahrsschrift," 1865, Bd. II, pp. 108, 109. 
171 



ECONOMIC CRISES 

market ^^ render no social service and consequently 
have no justification. It is by such practices and 
by the schemes of rings of operators to manipu- 
late the management of corporations with which 
they are connected and bring about the success of 
their private speculations, that the stock exchange 
has gotten a hard name.^^ 

While the creation of the stock market has 
provided the arena for the display of the evils of 
speculation, it has not originated them, except in 
the sense in which one can say private property 
has originated robbery. The stock exchange pro- 
vides the economy of centralization just as any 

17 The "London Economist" (Vol. LII, Part I, p. 418) con- 
siders that three-fourths of all transactions upon the stock exchange 
are dealings in margins. 

Arthur Crump says : " It may be readily conceded that a very 
large number of those who are ruined, or greatly injured, by stock- 
exchange speculation, would never operate at all if they were 
called upon even to make a deposit before the purchase was effected. 
But when it is considered that to abolish ' time-bargains ' would be 
to ruin at once half of the brokers in existence, the difficulty of 
effecting what from one point of view would be a most salutary 
change of custom, will be understood. The great mischief is done 
by the facilities afforded by ' time-bargains ' to operators who have 
a little money, just sufficient to enable them to keep afloat as specu- 
lators in fair weather. The first serious disturbance that violently 
agitates prices sweeps them away in a shoal." — "The Theory of 
Stock-Exchange Speculation," pp. 3, 4. 

1^ Instance the proved venality of a portion of the French press. 
See Charles T. Congdon, "The Adulteration of Intelligence," 
" North American Review," Vol. CXXXVI, January, 1883. Hunt's 
*' Merchant's Magazine," Vol. VIII, p. 459. An illustration of the 
evil influence of speculative interests upon courts and legislatures 
is given by C. F. Adams in " A Chapter on Erie." 
172 



CREDIT AND SPECULATION 

other market does. A considerable part of the 
transactions which take place there are as legiti- 
mate as those upon any other market. The very 
fact of organization, furthermore, makes possible 
a more efficient control of speculation than would 
otherwise be achieved. Writers upon agriculture 
are urging that the opportunity of regulating the 
conditions of stock raising which is presented by 
the concentration of business in the stock yards, 
should be seized, and that yard regulations be 
formulated to suppress diseases among cattle, and 
to accomplish other desired ends. In an analo- 
gous way, the undesirable practices connected with 
speculation may be repressed through the govern- 
ment of the stock exchange. 

It may be found desirable that stock exchanges 
should be subject to public control, but so long as 
they remain simply private associations their vol- 
untary regulations must be depended upon very 
largely. The exchange may exercise a sharp scru- 
tiny of the persons admitted to its membership by 
personal examinations. Candidates for member- 
ship may be required to make a deposit to insure 
conformity to the rules, as is required in France, 
or members proposing a candidate may be obliged 
to make such deposit, as in England. The estab- 
lishment of a mutual life insurance, amounting in 
New York to ;^ 10,000, and forfeitable upon failure 
to comply with rules, exerts an obvious influence. 
In its specification of what works forfeiture of 
membership, the stock exchange possesses great 
173 



ECONOMIC CRISES 

power to define for the business community the 
meaning of the terms " honorable " and " dishonor- 
able." A great influence may also be exerted by 
refusing to deal in the securities of concerns known 
to be dishonestly managed.^^ 

A few specific regulations designed to restrict 
speculation may be mentioned. Speculation in 
government securities is made illegal in England 
by the provisions of "Sir John Bernard's Act." 
All dealing in options on government securities is 
prohibited. " Bear " or " short " sales of bank 
shares in England were prohibited in 1837. Con- 
tracts made with a view of establishing a " corner " 
on the market are void in the United States. A 
broader statute is that in England against enhanc- 
ing the price of stocks to the damage of the pur- 
chasing public. Numerous enactments have been 
passed both in England and the United States for 
removing cognizance of law from all gaming and 
wagering contracts. The German Empire, on May 
19, 1885, enacted a law levying a tax of ^i.oo on 

1^ The London stock exchange distinguishes between brokers 
and jobbers, the latter not being permitted to deal on their own 
account, in order that they may be disinterested salesmen of the 
securities called for. The applicant for membership is rigidly 
examined, and must be guaranteed in the sum of five hulidred 
pounds each by two members against default within four years. 
Applicants must show that they are not engaged in any other than 
exchange business, and are not connected with institutions dealing 
with stocks. All members are elected annually, and may be re- 
jected on good grounds. General control is in the hands of an 
executive committee. No members of the exchange are permitted 
to advertise. 



CREDIT AND SPECULATION 

every ;^ 10,000 worth of stock transfers made upon 
the stock exchanges of that country. The United 
States War Revenue Act of June 13, 1898, pro- 
vides an annual tax of fifty dollars on brokers, a 
tax of ten cents on brokers' notes or memoranda 
of sale and a tax of two cents on each sale or agree- 
ment to sell stock amounting to one hundred dol- 
lars face value or fraction thereof. There is also 
a tax upon sales of merchandise on produce ex- 
changes which amounts to one cent for each one 
hundred dollars of face value. Such a tax is cal- 
culated to reduce the sensitiveness of the stock 
market. The same effect may be produced by 
jobbers' charges when it is customary, as in Eng- 
land, for brokers always to deal with jobbers. 
These "turns" or "fees," ranging from one-six- 
teenth to one-half per cent., obviously amount to a 
heavy tax. Certain writers upon public finance, 
notably Adolph Wagner, maintain that the taxa- 
tion of stock-exchange "deals" rests upon the 
same basis as an inheritance tax. It rests upon 
the principle that the state is justified in appropri- 
ating a part of those economic gains falHng to 
individuals because of a peculiarity in the existing 
economic order, but which are only in a subordi- 
nate degree the result of the recipient's own pro- 
ductive exertions. 

After all has been said, the problem of credit 

and speculation lies only in a secondary degree in 

particulars. It consists rather in the problem how 

to produce that general integrity and intelligence 

175 



ECONOMIC CRISES 

of public thought which will dictate the character 
of business.^^ If this commercial public opinion is 
properly developed, the problem of making its force 
felt in any part of the business field will not be 
exceedingly difficult, but if it is weak and insuffi- 

20 Upon the importance of public opinion Holtzendorff says : 
" In addition to the attention which the statesman always pays to 
public opinion, the jurist must not deny the fact that the economic 
life is strongly influenced by the state of public opinion; in so far 
that the condition of public credit, the value of paper money, and 
the recurrence of economic crises seem dependent upon it. The 
great stock-exchange regions of the European and American conti- 
nents are under its influence." — " Wesen und Werth der Oeffent- 
lichen Meinung," p. ii. Differences in public opinion in various 
countries he touches on p. 29. In regard to honor-debts in France 
Joseph Cook said : " French public sentiment so unflinchingly con- 
demns a man who acquires the name of bankrupt, either by rash 
speculation or by purposed commercial mischief, that it has been 
known again and again that a son would submit to the most pinch- 
ing poverty for years, practising more than the proverbial French 
thrift, in order to take a stain off the name of a father . . . Say, 
if you please, that all this is carrying this too far; it remains true 
that panics are few in France, although the spots on the physical 
sun affect her as much as us." — " Boston Monday Lectures," " So- 
cialism," pp. 34, 35. C. L. von Haller, in his " Restauration der 
Staatswissenschaften " (Winterthur, ' 1820-34), Bd. VI, p. 519, 
shows that in Geneva for several generations nothing was lost 
through honor-debts among the higher classes, because public 
opinion closed positions of honor to sons who left their fathers' 
debts unpaid. 

Some very suggestive material in regard to the way in which 
honor-debts are considered in various countries is contained in a 
report upon " Debts of Honor " in the " Consular Report " for 
August, 1893, Vol. XLII. Cf. Lalor's "Cyclopaedia," "Commercial 
Crises," Vol. I, p. 530; Schaffle in " Tiibinger Zeitschrift," Bd. XXX, 
1874, pp. 92, 93; "British Quarterly Review," Vol. LXIII, Janu- 
ary, 1876, p. 55. 

176 



CREDIT AND SPECULATION 

cient, technical and administrative hindrances to 
reform will spring up like giants on all sides.^i It 
is in a large measure due to the strict integrity 
enforced by public opinion in France and Holland, 
and especially in Switzerland, that these countries 
have kept so clear from overspeculation and eco- 
nomic crises.^ Almost every text-book that has 

21 Schaffle ("Deutsche Vierteljahrsschrift," 1858, Heft I, pp. 
419, 420) lays special emphasis upon freedom, responsibility, and 
publicity as commendable for the business as well as for the social 
and political world. 

By means of the German system of police registration a man's 
past business record can be quickly gathered in detail when needed 
for any purpose, as, for example, before he is permitted to do busi- 
ness permanently in a new city. The pressure exerted by such a 
system of police bookkeeping is obvious. 

A registration for this country which would make it possible to 
locate the ownership of capital stock would unravel a great many 
mysteries and prevent a great deal of dishonesty. 

22 The business integrity and conservatism which has brought 
this about in Switzerland is strongly emphasized by Schaffle, " Vier- 
teljahrsschrift," 1858, Heft I, pp. 375, 376. In a large measure the 
same applies to Holland. Of the Holland merchants he says: 
" Mynheer trades much with John Bull, has an extensive commerce 
with Brother Jonathan, strong connections with Hamburg, North 
Germany, and Scandinavia, he has banks and bankers, but remains, 
nevertheless, usually intact on all sides, which renews the proof 
that not institutions nor environment condition the national indus- 
trial fortune or misfortune of a country, but the self-control exer- 
cised by its people." — pp. 376, 377. 

There seems to be a retrogression noticeable in Germany. On 
this we quote Nasse : " We think two points will be granted by 
every unprejudiced student of the moral life of our nation; first, 
that the enforcement of an objective moral law of duty and moral 
responsibility until recently rested, among our lower and middle 
classes, upon religious grounds; secondly, that in the last decade 
N 177 



ECONOMIC CRISES 

had occasion to explain the nature of credit has 
brought clearly into prominence the fundamental 
truth that credit rests upon one man's belief in the 
ability and willingness of another to meet his obli- 
gations. No discussion of an abuse of credit, 
therefore, can end without at last coming back to 
the fundamental thing, honesty. Credit has been 
called a great teacher and the discipline of com- 
merce is truly a civilizing force. If this be true, 
crises may be looked upon as chastisement for 
mistakes and bad faith. The convulsions of mod- 
ern business would seem to indicate that the credit 
structures which have been raised in the business 
world are too lofty for the basis of integrity we 
have at present to offer. The remedy lies at every 
man's door. Civilization cannot merely migrate 
from country to country as it has done in the past ; 
we must learn how to intensify the economic and 
social bonds without self-destruction and without 
the increase of those economic wastes of which 
crises form a part. 

RESUME 

I. Crises have appeared with the development of credit, and 
visit countries using credit. 
{a) Credit creates economic solidarity. 
(^) Rests upon honesty. 
{c) Uses of credit. 

this foundation has been completely shattered with the uncultured 
wage- earning classes, and has not been replaced by an equivalent." 
— *>Ueber die Verhiitung der Produktions-Krisen," in"Jahrbuch 
fur Gesetzgebung," Bd. Ill, N. F., pp. 162, 163. 
178 



CREDIT AND SPECULATION 

Facilitates transfers of capital. 

Makes investments easy. 

Saves money and expenses of doing business. 
((/) Dangers of credit. 

Credit depends upon a state of mind, — con- 
fidence. 

May support extravagance and unwise invest- 
ments. 

Lessens the money reserve. 

Lengthens and complicates pecuniary obliga- 
tions. 

The underestimation of the future. 
(<?) Safeguards. 

Short-time credits. 

Punctuality. 

Sharp definition of the moral aspect of risking 
loss of another's money. 

Conservatism in optimistic times. 

Disentanglement from speculative businesses. 

Maintain the ^' standard of credit." 

Scrutiny of the first credit advances. 
II. Speculation coupled with credit becomes dangerous. 
(a) Definition. 

Speculation in the broad sense. 

Gambling, distinct from speculation, — charac- 
teristics of each. 
(^) Service of speculation. 

Lessens the domain of uncertainty. 

Prevents price fluctuations. 

(c) Dangers. 

Alliances of banks with stock market dangerous. 
Overestimation of one's ability. 
Dealings in "futures." 

(d) The functions of the stock market, — control pos- 

sible through it. 
III. The abuse of credit and speculation is primarily a moral 
problem. 

179 



CHAPTER IX 

THE PSYCHOLOGY OF CRISES 

Political economy is in an important sense 
applied psychology. As this science treats of a 
portion of the social activity of men, it must re- 
ceive as a part of its premises the statement of the 
psychologist regarding the individual and social 
psychology of man, and apply it in the explana- 
tion of economic society. 

As we have already seen, the causes of economic 
crises are numerous. No sufficient explanation of 
them can be made which does not take into account 
the working of the industrial and legal machinery 
which society employs in achieving its purposes, 
but neither can any view of crises be sufficient 
which leaves out of account the human nature 
operating through this machinery and exhibiting 
itself in it. Thus far, few writers have touched in 
any adequate way upon this aspect of the subject, 
although there are not lacking numerous assertions 
that its study is necessary and fundamental. Mr. 
John Mills, who, in his pamphlet entitled " Credit 
Cycles," has contributed more than any other per- 
son to this part of the theory, says, "The subject 
of commercial fluctuations will acquire a new dig- 
i8o 



THE PSYCHOLOGY OF CRISES 

nity if it be found striking its roots far below the 
level of its physical particulars, and proving itself 
cognate with the sciences of mind."^ In similar 
vein Yves Guyot expresses himself : " In economy, 
as in all other social phenomena, psychological 
facts play an important part. It is because they 
have not been sufficiently taken into account that 
we have had so many erroneous explanations of 
commercial crises." ^ In the explanation of the 
depression which follows a crisis, Horace White 
observes : " The pendulum will swing back in time 
— these undulations of trade, of alternately high 
and low prices, of alternate activity and depression 
in business, have their root in the mental and moral 
constitution of mankind." ^ Interest has been 
taken in these aspects of the subject by William 
Langton, and by the Italian economist Catteneo, as 
well as by the chroniclers of similar phenomena, 
Charles Mackay, Isaac Taylor, and C. F. Adams. 
But the literature of crises scarcely brings us fur- 
ther than such general statements as have been 
just quoted. 

It is intended in this discussion to place before 
the reader an outline of what are, in the estimation 
of the writer, the chief psychological phenomena 
of crises. 

A word may be prefixed regarding the chief 

1 " Credit Cycles," p. 13. 

2 " Principles of Social Economy " (translated by Lippington) 
2d ed., Ch, III, p. 239. 

* Lalor, " Cyclopaedia," " Commercial Crises," Vol. I, p. 524. 
181 



ECONOMIC CRISES 

theories of crises now accepted, considering them 
from the point of view of their psychology. Some 
sort of a psychology is of necessity assumed by 
writers upon social subjects, and consequently by 
those who have constructed theories to explain 
crises. This fundamental psychology is frequently 
in the literal sense an assumption, being adopted 
without careful thought. It is consequently often 
inconsistent or at least weak and defective. Those 
socialists who explain crises as a part of an inevi- 
table evolution of industry, and who hold the ma- 
terialistic philosophy of history, subordinate the 
consideration of all moral forces to the evolution 
of the technique of industry. The pictures which 
they draw contrasting the depravity of the present 
with future perfectibility, rest upon the assumption 
of a plastic human nature ; an assumption which 
their ironically critical attitude and urgent moral 
appeals belie. 

The wages theory of crises enunciated by Rod- 
bertus presents a curious picture of society when 
looked at from the point of view of its psychology. 
It shows us a wage-earning population, frugal and 
industrious, producing a surplus beyond what is 
needed to satisfy its needs, yet permanently held 
down through the power of capital by a class pos- 
sessing neither frugality nor the ability to guide 
properly the industrial forces in their charge. The 
implication is that the relation between capacity 
and achievement can be completely sundered. 

When credit is discussed in connection with 
182 



THE PSYCHOLOGY OF CRISES 

crises, it leads through the defects of social prac- 
tice almost immediately to the consideration of the 
indicated defects of human nature. It points to 
an intense ambition to be rich which leads to the 
overuse of credit instrumentalities in building up 
business, and to a lack of keenness in ethical dis- 
crimination in realizing the ethics of risking the 
loss of another person's money. It indicates an 
inabiHty to realize fully the force of future obliga- 
tions, and overconfidence in one's judgment and 
economic strength leading to the overtaxing of 
one's economic power and hence to failure. 

In the discussions of this chapter let us examine 
the psychological elements of crises directly and 
for their own sake and not merely as an adjunct 
to some other explanation. 

The general characteristics of crises are already 
sufficiently familiar. They may be reviewed briefly 
in the words of Lord Overstone, " State of quies- 
cence, improvement, growing confidence, prosper- 
ity, excitement, overtrading, convulsions, pressure, 
stagnation, distress, ending again in quiescence." 
This description presents to us a succession of 
stages through which business passes during the 
complete crisis-period. For each of these stages 
there is a special and characteristic mental state. 
Each stage indicates a view taken of the course of 
trade and of business prospects generally.* The 
general change which marks the progress up to 

* John Mills, " Credit Cycles," p. 17. 

183 



ECONOMIC CRISES 

the crisis is a gradual growth of optimism. There 
accompanies this a gradual increase in activity and 
a perceptible and constant quickening of interest 
worthy in its later stages to be called a profound 
emotion. With this, as the pre-crisis period ad- 
vances, comes a decline of criticism and an increas- 
ingly unsound business judgment. These changes 
give expression to themselves by what appears to 
be a rapidly expanding business in which an in- 
creasing use is made of credit in all forms.^ The 
activity noticeable before a crisis is a function of 
the feeling of confidence prevailing, for the simple 
reason that when people who want money believe 
it is being made, they redouble their exertions to 
get it. This leads to the vis a tergo behind the 
whole process, which is the desire for wealth. It 
is this constantly operating force which erects the 
economic machinery destroyed in the crisis and 
which operates it in such a way as to lead to the 
crisis. 

The question arises. Why does the desire for 
wealth miscarry in satisfying itself and lead to 
such wastes as are involved in a crisis } We know 
that a gradually approaching prospect of satisfy- 
ing a desire excites emotion. A piece of good 

^ Macleod, speaking of the growth of unsound credit, says : 
" Such quantities of credit cannot accumulate in a day. A certain 
time is required under ordinary circumstances to produce a crisis, 
just as a certain time is necessary to generate an abscess or a tumor 
in the human body." — "Theory of Credit," Vol. II, Part II, Ch. 
XVI, Sec. 20, p. 724. 

184 



THE PSYCHOLOGY OF CRISES 

fortune happening to one person which brings near 
the prospect of wealth to others will often craze 
an entire industrial community. This is well illus- 
trated by the history of prospecting for metals. 
In California, after the first discoveries in 1849, ^^^^ 
state was searched from end to end for gold. The 
reported finding of a ledge of pure silver brought 
on a craze for silver in 1858-59. When a rich but 
shallow vein of copper was discovered at Copper- 
opolis in Calaveras County in i860, a copper mania 
was inaugurated which culminated in 1863. Dur- 
ing the great oil speculations in Pennsylvania a 
petroleum fever seized the state.^ Now it is 
equally well known that a high state of feeHng 
precedes and accompanies a crisis and slowly sub- 
sides after it. The existence of these stages of 
feeling gives us the hint to examine the effect 
which the concentration of desire in an extraordi- 
nary degree upon an object and the accompanying 
of this with strong feelings have upon the judgment 
and the conduct. 

In examining the influence of such a mental 
state, we shall find it convenient first to consider 
the individual psychology, then the social psychol- 
ogy. And we shall begin by distinguishing the 
effect of strong desire accompanied by emotion 
upon the interpretation of matters of recollection 
and upon anticipations. The guiding principle is 
this : a powerful emotion tends to bring all the 

6 H. H. Bancroft, " History of California," Vol. VII. 
185 



ECONOMIC CRISES 

operations of the mind into harmony with itself 
and to banish from the mind all considerations 
out of harmony with itself. This unbalancing of 
the mind leads to destructive individual and social 
activity. 

First, then, turning our attention to the psy- 
chology of the individual, let us note the effect of 
a powerful desire upon recollection. It exhibits 
itself in four ways which may be here distin- 
guished, (a) The force of the original impression 
which is later to be recalled, depends upon what 
our interest in the matter was at the time and 
what our appreciation of the significance of the 
occurrence was. We do not see things as they 
are, but as they appear through the media of our 
education and interests. As James Sully says : 
*' Recollection is a selective process, and this truth 
is strikingly illustrated in the growth of our endur- 
ing representations of things. What stamps it- 
self on my memory is what surprises me or what 
deeply interests me at the moment." "^ (d) There 
is a tendency to confuse the recollection of exter- 
nal actualities with that of subjective states due 
to imagination and desire. The tendency is to 
assume in recollection that all impressive mental 
states result from a sufficient external cause. An 
example of this given by one psychologist is as 
follows: One dreams of seeing snow fall. He 
awakens and sees snow lying on the ground. 

■^ " Illusions," p. 314. 
186 



THE PSYCHOLOGY OF CRISES 

Later he asserts that he saw it fall and saw it 
lying on the ground. The more frequently this 
assertion is made, the more invincible will become 
the belief. A further illustration may be found in 
the memories of liars. It is well known that pre- 
varication rapidly confuses and distorts one's rec- 
ollections so that even with the best of intentions 
a return to the truth becomes difficult for a chronic 
liar, if not well-nigh impossible, {c) There is a 
continual selection of details in the act of recall- 
ing. If we have been influenced by strong desires, 
we have been recalling and dwelling upon such 
matters as have harmonized with these desires. 
The sharpness and vividness of an act of recalling 
depends upon how frequently the matter has been 
recalled. Thus one becomes more convinced in 
regard to a matter as it passes into memory. A 
theory to explain the circumstance is formed. 
The recollection of details not agreeing with or 
fitting into this theory, and at first easy, fades little 
by little, leaving only such details as are custom- 
arily recalled because they correspond with the 
views we have taken. The selective process 
makes firmer the view first taken, whatever that 
may be. Matters which are, as we say, banished 
from recollection tend to fall out of mind entirely. 
The operations of the selective memory may be 
traced in some parents who out of the details of 
the lives of their children choose elements which 
form a picture of winning and precocious childhood, 
while their neighbors may retain recollections of 
187 



ECONOMIC CRISES 

an entirely different sort. A somewhat analogous 
process is that social one by which a nation little 
by little constructs from the life of a departed 
leader the picture of an all-round hero, (d) Finally, 
at any moment of recollection the tendency is, if 
one is influenced by a strong desire, to permit only 
such recollections to develop themselves and ab- 
sorb the attention as harmonize with the present 
state of mind. 

This distortion of recollection, performed in the 
ways which we have enumerated, tends to destroy 
the basis of sound judgment. In falsifying memory 
it renders nugatory the results of experience. 

The effect of a strong desire upon expectation 
is equally remarkable. In an act of anticipation 
the judgment is to a certain extent freed from the 
correctives and checks which restrain us from 
error in realizing the present and recalling the 
past. There is thus range for a greater degree 
of error due to prejudice. And these errors may 
everywhere be observed in acts of anticipation. 
The mind tends to restore the equilibrium between 
pain and pleasure and to renew its vigor by con- 
trasting the expectation of a pleasing future — ■ 
the '' joys of hope " — with a dismal past or unsatis- 
factory present. In so far as the course of the 
future is uncertain, our beliefs regarding it are 
likely to be formed according to our desires. We 
know that subjective states exercise more control 
over the imagination than over any other activity 
of mind. The field of imagination lies close to 



THE PSYCHOLOGY OF CRISES 

that of expectation. In so much as the tendency 
of imagination is to picture what is desired, opti- 
mism characterizes one's views of the future gen- 
erally. This, according to an authority upon 
stock markets, characterizes the speculator. " The 
most brilliant good fortune which may result from 
the operations of a speculator generally fall below 
his anticipations, when the operations are reduced 
to figures. It appears that the imagination gets, 
as it were, diseased by feeding on the contempla- 
tion of very rapid gains ; and that whatever may 
be the reality of a hypothetical gain, the mind gets 
bewildered and fails to estimate as an element of 
loss the surrounding husks in which the fruit is 
enclosed." ^ What we may logically expect in the 
future, from analogy with the past, is not what we 
do actually expect. We all know that a person 
plans for a certain period of the future more work 
than he will be able to accomplish. A man pic- 
tures to himself greater success and happiness than 
is likely to be his actual lot. And this results in 
considerable part from the influence of an absorb- 
ing desire. What is vividly imagined and intensely 
desired tends to become, little by little, a matter 
not only wished for, but planned for, and finally 
expected with more and more confidence. All this 
may take place without the addition of any new 
confirming objective reality.^ Shakespeare often 

8 Arthur Crump, "Theory of Stock-Exchange Speculation," p. 3. 
^ Upon this source of error in expectation Sully says, " Even 
supposing the expectation to have originated from some rational 
189 



ECONOMIC CRISES 

put his finger upon this weakness of human char- 
acter. When Prince Henry, supposing his father 
dead, takes the crown from the brow of the sleep- 
ing king, and his father calls him to account, the 
prince says, " I never thought to hear you speak 
again." The king, responds, "Thy wish was 
father, Harry, to that thought." ^^ Similarly Caesar 
in his Gallic Wars says : " Multae res ad hoc con- 
silium Gallos hortabantur : superiorum dierum 
Sabini cunctatio, perfugae confirmatio, inopia ci- 
bariorum, cui rei parum diligenter ab iis erat pro- 
visum, spes Venetici belli, et quod fere libenter 
homines id, quod vohmt, credunt.'' Young said, 
"What we ardently wish we soon believe," and 
Bacon, " Men's thoughts are much according to 
their inclination," ^^ and again in Novum Organum, 
Lib. I, Aph. XLIX, " Quod mavult homo verum 
esse, id potius credit." Lester F. Ward has well 
stated the same truth : " The reason is perpetually 
called upon to subdue extravagant expectations. 
Even in man those individuals are rare whose 

source, as from a conscious inference from past experience, or from 
the acceptance of somebody's statement, the very habit of cherish- 
ing the anticipation tends to invest it with an automatic self-suffi- 
cient character." — ■"Illusions," p. 302. And again he says, on 
p. 306: "There are, I conceive, good reasons for saying that "any 
kind of vivid imagination tends to pass into a semblance of an 
expectation of a coming personal experience, or an event that is 
about to happen within the sphere of our own observation. It has 
long been recognized by writers, among whom I may mention 
Dugald Stewart, that to distinctly imagine an event or object is to 
feel for the moment a degree of belief in the corresponding reality." 
10 " Henry IV," Part II, Act IV, Sc. IV. n " Essays," XXXIX. 
190 



THE PSYCHOLOGY OF CRISES 

judgments are of any value against their interests. 
Prediction of results is in most cases nothing better 
than betrayal of preferences. Men as a rule 
believe that that will happen which they wish to 
happen. . . . No one is capable of balancing 
the profits and losses of life. The lower in the 
scale of intelligence the more complete this inca- 
pacity." ^^ This optimistic picturing of the future 
leads, in passive natures, to "waiting for some- 
thing to turn up," and in strong natures to various 
forms of ill-advised activity. 

The application of this to the subject of crises 
comes through the study of the effect which an 
intense desire to accumulate wealth will have upon 
the conduct of the individual in economic matters. 
The active and energetic and self-reliant, who 
naturally become the leaders in industrial society, 
are of the intellectual type most prone to optimistic 
exaggeration.^^ Experience proves that, to the 
optimistic, gambling is particularly easy.^* Certain 
it is that credulity begets extravagance and fur- 

12 "The Psychic Factors in Civilization," p. 66, Boston, 1893. 
See also " Literary Remains of the Late William Hazlitt," Essay 
IV, " Belief whether Voluntary," New York, 1836. 

^3 Commenting upon the cause of the crisis of 1 85 7, Wagner 
says : " The chief blame, in our opinion, should be laid to the wild 
' go-ahead ' spirit of the Yankee. The matter was on this occa- 
sion made especially easy by the indiscreet and overplentiful offer 
of credit made by Europe, namely, England and Germany." — 
"Die Geld-und Credit-theorie der Peel'schen Bankacte," p. 263. 

1* Cf. James Oliphant, "Westminster Review," "The Ethics of 
Gambling," Vol. CXXXVII, pp. 521, 522. 
191 



ECONOMIC CRISES 

nishes the harvest for fraud.^^ The exaggeration 
of economic prospects begets not only activity, but 
falsely directed activity, the result of which is to 
erect a commercial structure which at some point 
in its building up must fall with disastrous ruin 
because of its inherent error. If too much of our 
thought and interest is concentrated upon the 
struggle for wealth and our reasoning holds true, 
we have the explanation of the optimism ^^ and reck- 
lessness which may be seen in pre-crisis periods 
preparing the conditions for a future crash. That 
such an overconcentration of interest in material 
wealth as will bring on these results does exist in 
the chief nations which have passed into the stage 
of industrial freedom is a matter of most positive 
affirmation on the part of many of the most in- 
fluential thinkers of our day. It would be indeed 

1^ " The good times, too, of high price almost always engender 
much fraud. All people are most credulous when they are most 
happy; and when much money has just been made, when some 
people are really making it, when most people think they are mak- 
ing it, there is a happy opportunity for ingenious mendacity. 
Almost everything will be believed for a little while, and long 
before discovery the worst and most adroit deceivers are geo- 
graphically or legally beyond reach of punishment." — Bagehot, 
" Lombard Street," "Works," Vol. V, p. 103. 

1^ Lord Overstone founded crises in human nature. " So long as 
human nature remains what it is, and hope springs eternal in the 
human breast, speculations will occasionally occur, and bring with 
them their attendant train of alternate periods of excitement and 
depression. Storms and tempests are not more certain and inevi- 
table in the material world than are the periodical convulsions of 
commercial affairs; and they both answer similarly useful pur- 
poses." — '* Management of the Circulation," " Tracts," pp. 131, 132. 
192 



THE PSYCHOLOGY OF CRISES 

strange if it could be shown that the passion for 
the accumulation of wealth not only robs social 
life of many of the nobler forms of enjoyment, but 
defeats itself in its purely utilitarian purpose not 
only through the neglect of the art of consuming 
wealth, but through the misadjustment of produc- 
tion and the destruction wrought by economic 
crises. 

The belief that this is true is fortified by history, 
which shows that an undue concentration of inter- 
est on other than economic matters has been fol- 
lowed by social maladies in many ways analogous 
to crises. It has been asserted that the New Eng- 
land religious epidemics and witchcraft scares were 
the result of an undue concentration of thought 
along the lines of religious contemplation. Prof. 
C. F. Adams, after describing the terroristic type 
of theology and preaching accepted in New Eng- 
land, says : " It would have been inconsistent with 
any accepted theory of human nature that the 
moral conditions, continually and systematically 
developed by the treatment which had been pre- 
scribed, should not periodically have broken out 
in phases of acute mania. At first the acute at- 
tacks of the mania took the forms of ordinary reli- 
gious persecutions, finding vent against Baptists and 
Quakers ; then it assumed a much more interest- 
ing phase in the Salem Witchcraft craze of 1691-92. 
The New England historians have usually re- 
garded this curious and interesting episode as an 
isolated phenomenon, to be described as such, and 
o 193 



ECONOMIC CRISES 

then palliated by reference to the far more fero- 
cious and unthinking maniacal outbreaks of like 
nature in other lands at about the same time. 
This is simply to ignore its significance. . . . The 
mania of 1691-92 in Massachusetts was no isolated 
or inexplicable manifestation ; on the contrary, it 
was a most noticeable instance of the operation of 
law." 17 

These epidemics developed at about equal inter- 
vals of time from one another, and later under 
somewhat changed conditions gave place to a simi- 
lar succession of revivals. ^^ The series was broken 
up when a new interest was created in the Revolu- 
tionary War, though in some instances the reli- 
gious epidemics reappeared later. Crises and 
religious epidemics are alike evidences of unbal- 
anced interests. Similarly the undue concentration 
of interest upon political matters, as in Greece and 
the South American states and in France, has been 
conducive to instability of government rather than 
the reverse. A further evidence that crises are 
the result of an undue concentration of interest 
upon economic affairs is offered by the fact that 
when war absorbs the interest of a people, the cri- 
sis cycle frequently lapses. The same thing has 
been noticed in the relation between crises and 
political elections. The suggestion of this is 
apparent. If we could cultivate other interests 

17 " Massachusetts," p. 85. See also R. G. Thwaites, "The Colo- 
nies," p. 191 ff. 

18 C. F. Adams, " Massachusetts," p. 89. 

194 



THE PSYCHOLOGY OF CRISES 

sufficiently to right the intellectual balance, the cri- 
sis period might lapse indefinitely. 

We have seen that a strong desire exercises a 
greater influence over acts of recollection and 
expectation than over the simple primary judg- 
ments of the present. Our industrial age, produc- 
ing wealth as it does by means of long-enduring and 
complex processes, brings into the closest relations 
the economic past and future with the present. 
Our methods of production fit us into a chain of 
influences and activities which was begun in the 
past and for the consummation of which we must 
look to the future. Expectation and forecast play 
a more important economic role to-day than ever 
before, and business demands the exercise of those 
intellectual faculties which are most distorted by 
an overdeveloped desire for wealth. 

We have seen that desire will largely shape expec- 
tation where objective data for judgment are defec- 
tive and the matter is involved in uncertainty. It is 
not necessary to assert that the course of modern 
business is uncertain in the extreme. As business 
ventures must be based on future contingencies, 
as the market widens, and the number of competi- 
tors increases, uncertainty must increase. This was 
sufficiently enlarged upon in the chapter on ''The 
Organization of Industry." Those lines of business 
which have been conspicuous for their uncertainty 
have, many of them, been conspicuous also for the 
crises suffered in them. An element of uncer- 
tainty is prominently connected with most crises. 
195 



ECONOMIC CRISES 

In 1 719, in France, at the time of the Mississippi 
Scheme, the issue was upon the probable future 
value of an exclusive privilege given by France to a 
company to trade in the little known region of the 
East Indies, China, and the South Seas. In 1720, 
in England, it was upon the probability that the 
South Sea Company would obtain exclusive grants 
of trading privileges from Spain, and as to the 
value of these. In Holland, from 1634-36 the uncer- 
tainty was what the demand of the world would be 
for certain varieties of tulips. The industry of the 
present finds the requisite degree of uncertainty 
in the complex conditions which determine the 
course of the world's markets. Foreign trade has 
always been noted for its uncertainties, and it has 
been equally noted for the extravagancies which 
have been connected with it. 

There seems to be, in the human mind, a neces- 
sity for a belief or theory of some sort and an 
unwillingness to keep the mind in suspense for 
more data.^^ Therefore a temporizing, conserva- 

1^ A very remarkable analysis of the beliefs arising during the 
process of gambling is given in the following extract from an arti- 
cle which appeared in the " Spectator," October 4, 1873, and which 
is quoted at length in Arthur Crump's " Theory of Stock-Exchange 
Speculation," pp. 52, 53: "And what was that experience? This 
chiefly, — that I was distinctly conscious of partially attributing to 
some defect or stupidity in my own mind every venture on an 
issue that proved a failure; that I groped about within me for 
something in me like an anticipation or warning (which, of course, 
was not to be found) of what the next event was to be, and gener- 
ally hit upon some vague impulse in my own mind which deter- 
mined me; that whenever I succeeded, I raked up my gains with 
196 



THE PSYCHOLOGY OF CRISES 

tive, and restraining policy is easily forsaken for 
one which embodies an optimistic theory, and the 
error of a theory cannot at once be made appar- 
ent. The organization of business is now such 
that it does not furnish an immediate check to 
unwise activities. The system is one which per- 
mits the inflations of values and an overdraft of 
credit for a period long enough to give an impe- 
tus to such undertakings and give an unfounded 
feeling of success *^^ to operators who may be, as a 
matter of fact, on the straight road to disaster. 

a half-impression that I had been a clever fellow and had made a 
a judicious stake, just as if I had really moved a skilful move at 
chess; and that when I failed, I thought to myself: Ah, I knew 
all the time I was going wrong in selecting that number, and 
yet I was fool enough to stick to it; which, of course, was a pure 
illusion, for all I did really know was that the chance was even, or 
much more than even, against me. But this illusion followed me 
throughout. I had a sense of deserving success when I succeeded, 
and of having failed through my own wilfulness, or wrong-headed 
caprice of choice, when I failed. . . . When you win at one time, 
and lose at another, the mind is almost unable to realize steadily 
that there is no reason accessible to yourself why you won and 
why you lost. And so you invent — what you know perfectly well 
to be a fiction — the conception of some sort of inward divining rod 
which guided you right when you used it properly, and failed only 
because you did not attend adequately to its indications." 

20 Natural optimism is sufficient in many instances to account for 
this feeling of success. " There has never been a successful gam- 
bler who has not believed that his success (temporary though such 
success ever is, where games of pure chance are concerned) has 
been the result of skilful conduct on his own part; and there never 
has been a ruined gambler (though ruined gamblers are to be 
counted by thousands) who has not believed that when ruin over- 
took him he was on the very point of mastering the secret of suc- 
. 197 



ECONOMIC CRISES 

We have thus far discussed individual psychol- 
ogy. Let us turn to the examination of certain 
social forces operating to bring about crises. 

We have been giving prominence to the effect 
of belief upon action. It is not intended to ignore 
the equally important effect of action upon feelings 
and beHefs. But as actions are more ruled by 
social considerations than are beliefs, the discussion 
of the effect of action has been postponed to this 
point. 

The persistent exertion of will power to force 
one to a certain line of action possesses a remark- 
able power to coerce the feelings into harmony 
with the action performed. In the competitive 
system, the business man is soon taught that to 
court success properly he must put on all the 
appearance of success, and talk, act, and look as if 
he were successful. A merchant attracts trade by 
professing that he already has it and by acting as 
if he were in the height of a deserved prosperity. 
Merchants drive trade with merchants by talking 

cess. It is this fatal confidence which gives gambling its power 
of fascinating the lucky as well as the unlucky. The winner con- 
tinues to tempt fortune, believing all the while that he is exerting 
some special aptitude for games of chance, until the inevitable 
change of luck arrives; and thereafter he continues to play because 
he believes that his luck has only deserted him for a time, and 
must presently return. The unlucky gambler, on the contrary, 
regards his losses as sacrifices to insure the ultimate success of his 
' system,' and even when he has lost his all, continues firm in the 
belief that had he had more money to sacrifice, he could have 
bound fortune to his side forever." — " Littell's Living Age," " Gam- 
bling Superstitions," Vol. CXIV, p. io6. 
198 



THE PSYCHOLOGY OF CRISES 

general trade prosperity to one another. Adver- 
tisements must always assume a confident, cheer- 
ful tone and give the impression of assured success. 
Physicians, to court the best clientage, must live 
well, dress well, drive stylish equipages, and assume 
all the appearances of success. All these actions 
do very truly tend to coerce feelings and opinions 
into Unes harmonious with themselves and enforce 
the appropriate feelings of optimism which, as we 
have seen, are only too ready to spring up and 
dominate the thought. At this point a suggestion 
of Walter Bagehot may be recalled. He con- 
tended that this generation was afflicted by too 
great a desire for activity, and that this surplus 
activity accounted for some of the serious defects 
of our economic practice. Optimism is the appro- 
priate mental state to accompany activity. This 
activity and optimism produce the gullible public 
and the promoter who sees fields for enterprise 
where no enterprise should be undertaken.^i 

Next to the optimistic activity which the com- 
petitive trade system enforces upon its members, 
the economic consequences of belief in testimony 
should be considered. If the individual mind 
works imperfectly and is prone to certain chronic 
errors, the social mind is yet more unsatisfactory 
in many ways. In the social mind, the tendency 
toward optimistic, extreme, and intense views 
appears more marked. We receive only a small 

21 Bagehot, " Physics and Politics," " Complete Works," Vol. IV, 
P- 567- 

199 



ECONOMIC CRISES 

portion of our beliefs as a result of our own 
observation and independent thought. Most of 
our guidance comes from the testimony of others. 
This ready-formed opinion our intellectual inertia 
leads us to accept. The coercive power of a gen- 
erally accepted view is very great, and only the 
most independent minds can hold out against it.^^ 
Under the influence of the struggle for eminence, 
success comes to the front for display, while failure 
tries to hide itself. In so far as economic forces 
are controlled by the struggles of individuals for 
success, it is optimistic testimony which is most 
available in economic matters. The businesses 

22 Alexander W. Kinglake, in his book " Eothen," brings out the 
power which the generally accepted opinion has over the stoutest 
doubter. He refers to the effect upon Europeans of the Eastern 
belief in magic, " There is no controversy about the matter. The 
effect of this, the unanimous belief of an ignorant people upon the 
mind of a stranger, is extremely curious and well worth noticing. 
A man coming freshly from Europe is at first proof against the 
nonsense with which he is assailed; but often it happens that after 
a little while the social atmosphere of Asia will begin to infect him, 
and, if he has been unaccustomed to the cunning of fence by 
which reason prepares the means of guarding herself against fal- 
lacy, he will yield himself at last to the faith of those around him; 
and this he will do by sympathy, it would seem, rather than from 
conviction. I have been much interested in observing that the 
mere ' practical man,' however skilful and shrewd in his own way, 
has not the kind of power that will enable him to resist the gradual 
impression made upon his mind by the common opinion of those 
whom he sees and hears from day to day." — Ch. VIII. 

Bagehot, in " Physics and Politics," referring to the above, says, 
" In true metaphysics I believe that (contrary to common opinion) 
unbelief far oftener needs a reason and requires an effort than 
belief."— "Complete V^orks," Vol. IV, pp. 494, 495. 
200 



THE PSYCHOLOGY OF CRISES 

which are to be seen are those which have survived 
the shocks of trade. Those which have failed 
have disappeared. Success is contagious. A prom- 
inent American paper recently published this state- 
ment : " It will be noticed that the list of Wall 
street losers is never published." Another trade 
paper contains the following : " Mark Twain, in 
one of his books, says he never saw in all the 
splendid battle scenes in the Louvre a picture of a 
single French defeat, and the remarks contain a 
large amount of sound philosophy. Hence it is 
not the rule, or the exception either, for the news- 
papers to chronicle advertising failures, of which 
there are undoubtedly many." Not only is the 
true success in evidence, but a false showing is 
made by the counterfeit of success which the 
struggle for social position leads many to attempt, 
when reason would counsel a more humble course. 
This false social attitude toward economic affairs 
may be expected to continue so long as the eco- 
nomic life is overemphasized. So long as business 
success is taken as the sovereign criterion for judg- 
ing of a man's character and ability, every motive 
which can lead a man to desire good standing in 
the eyes of his fellow-men will lead him to struggle 
for economic success and counterfeit it when not 
really achieved. A subordination of the economic 
test to other tests would decrease the intensity of this 
struggle and diminish the fundamental influences 
which now make for crises. It only remains to be 
noticed that the influences here discussed derive 

20I 



ECONOMIC CRISES 

their force and significance from their social char- 
acter. The closer a business man is in touch with 
his competitors, the more will competition and emu- 
lation stimulate him. Competitive business in trade 
centres becomes more or less like industrial war- 
fare or a series of personal combats. The leaders 
naturally recognized are those who excel in the 
achievement of that toward which all are working, 
and their influence, as leaders, is to mould others 
to a type with themselves. In the heat of this 
struggle unwise ventures are made, unwise expen- 
ditures are encouraged, and the moral code is 
stretched to the breaking point The business 
world deceives itself and thwarts itself. 

To return to the passage of opinions from one 
to another in a social group, it may be observed 
that growth of erroneous beliefs can be carried 
much further by a crowd of persons associated 
than by the persons composing it when separated. 
This is brought about by the reaction of opinion 
upon opinion. As McCulloch said: "In specula- 
tion, as in most other things, one individual derives 
confidence from another. Such a one purchases 
or sells, not because he has any particular or accu- 
rate information in regard to the state of the 
demand and supply, but because some one else 
has done so before him." ^^ If it be granted for 
purpose of argument that each individual may be 
capable of only a limited error in estimating the 

23 Bowen, " Principles of Political Economy," p. 437. 
202 



THE PSYCHOLOGY OF CRISES 

future condition of industry upon the basis of 
present indications, it will be seen that his opin- 
ion, as expressed or implied by his acts upon the 
market, may serve as evidence from testimony for 
others. They, in turn, when considering the same 
problem, will allow a certain weight to this testi- 
mony. If we suppose a like inclination on their 
part to see business success as certain where it is 
desired, they may advance by means of their indi- 
vidual increment of error one step further than the 
previous trader toward a speculative and unsound 
estimate. The market dealings resulting from this 
second or derivative judgment may in turn serve 
as the basis of a still more erroneous estimate made 
similarly by others. Thus one may serve to bol- 
ster another up. The opinion of the associated 
trading public is reflected back and forth, while 
with each successive transfer of influence an 
increment of error is added which Ufts the entire 
group, step by step, through the mutual accumula- 
tions of error in the direction of overconfidence 
and recklessness to a point of absurdity further 
than any one of those involved would, with the 
ordinary use of his reason, have advanced himself 
singly. 

Although these accumulations of error are most 
important, the influence of belief in testimony can 
hardly be made to account for all the vagaries of 
belief which accompany a crisis. States of mind, 
hopes and beliefs, are communicated from one to 
another by means of what is best described as 
203 



ECONOMIC CRISES 

sympathy. The intense feeling which can be 
produced in reUgious, poHtical, or other assem- 
blages, is something more than can be accounted 
for by the mere argument presented to the mind. 
The more intimate the association, the more will 
the common thinking processes be influenced by 
the sympathetic force. The most extreme phase of 
the operation of this force is seen in the unthinking 
ferocity of mob action.^* Inasmuch as the- pre- 
vailing economic system enforces intimate associa- 
tion in a sense in which no previous system ever 
did, this class of influences tending to vitiate the 
economic reasoning of those who are subject to 
market influences may well demand serious atten- 
tion. Businesses are being increasingly concen- 
trated in large cities, and especially are those who 
control them being closely compacted together in 
the business sections of great cities. It has been 
asserted that these conditions originate the influ- 
ences which breed crises, and the case of Australia, 
where the population is unusually concentrated in 
cities, has been cited as evidence. ^^ " A large city 
is characterized by an intensity of internal imita- 
tion in proportion to the density of population, 

^^ Boris Sidis, in an article entitled, " A Study of the Mob," in 
the "Atlantic Monthly" (Vol.LXXV, P^ebruary, 1895, PP* 188-197), 
points out the very significant relation between mobs and igno- 
rance, monotony of life, and social oppression. Cf. Cesare Lom- 
broso, "A Study of Mobs," " Chautauquan," June, 1892; Bureau 
of Education "Circular of Information, No. 4," 1893, "Abnormal 
Man," p. 109. 

25 Mr. H.J. Fletcher, in the "Forum," August, 1895. 
204 



THE PSYCHOLOGY OF CRISES 

and the multiform multiplicity of the relations of 
its inhabitants. Thus there is an epidemic and 
contagious character given not only to its diseases, 
but to its styles and views." ^6 The so-called 
"booms" of American towns illustrate in acute 
form the occasional economic effect of these influ- 
ences. The power of mental contagion is increased 
by such facilities for assemblage and communica- 
tion as the railway, telegraph, and telephone. It 
is obviously enhanced by the practice of transact- 
ing business in industrial assemblages such as 
stock and produce exchanges. Attention may be 
called to the fact that in periods of unusual busi- 
ness success or depression, this physical concen- 
tration of traders in large markets is greatly 
increased. 

The force of sympathy and imagination in the 
propagation of opinions is not an intelligent one 
and in economic matters it makes for the support 
of opinions dangerous to the stability of industry.^^ 

26 G. Tarde's book, " Les Lois de I'lmitation," is thus summar- 
ized in "Circular No. 4," 1893, of the Bureau of Education, p. 166. 

2'^ " That the pubHc opinion of the masses is not in the rule the 
result of a careful proving and sifting of facts has been already 
emphasized. The views vi^hich little by little, as occasion offers, 
establish themselves as the reigning opinion are produced rather 
by the working together of a group of factors, partly active and 
partly passive. Among the latter the most important is the instinct 
for imitation which plays an important role, not only in regulating 
the externals of society, the forms of social intercourse, clothing, 
etc., but opinions and beliefs as well. The majority of men be- 
longing to the middle and lower ranks of society readily absorb 
those opinions regarding public matters which they hear most 
205 



ECONOMIC CRISES 

An undue concentration of interest resulting in 
intense emotion is always prejudicial to sound rea- 
soning. The general tendency of emotion is to 
paralyze thought, and particularly to withhold the 
mind from those considerations which are out of 
harmony with itself.^^ The social effects of the 
undue haste to be rich are quite as serious for the 
social structure of industry as we have already 
seen the exclusive attachment of interest to a sin- 
gle aim is to the individual intellect. It is a strong 
arraignment of the ruling passion which is given 
us by the German writer Neuwirth in the follow- 
ing conclusions based upon the study of the cri- 
sis of 1873 : "The extravagant love of gambling 
and the restless, passionate chase after wealth form 
the root of all crises. These things produce 
their effects more frequently and destructively as 

frequently and emphatically expressed by others." See Franz 
Holtzendorff, " Oeffentliche Meinung," p. 93. 

Most young men espouse the political parties of their fathers. 
The " church of one's choice " is usually the one attended by one's 
parents. 

The sympathetic influence we are considering is doubtless allied 
to hypnotic influence. Cf. Edward Fry, "Imitation in Human 
Progress," "Contemporary Review," Vol. LV, 1889, p. 662; Albert 
Moll, " Hypnotism," pp. 221, 222. 

28 Alexander Bain enunciated the law : " When we are under a 
strong emotion, all things discordant with it keep out of sight. A 
strong volitional urgency will subdue an opposing consideration 
actually before the mind; but intense feeling so lords it over the 
intellectual trains that the opposing considerations are not even 
allowed to be present." — " The Emotions and the Will," p. 523. 
See Chalmers' celebrated sermon " On the Expulsive Power of a 
New Affection"; James Sully, "Illusions," pp. 308-316. 
206 



THE PSYCHOLOGY OF CRISES 

our age thinks, trades, and lives more quickly. 
Science may ever so skilfully indicate the ultimate 
causes of industrial storms and their periodic 
recurrence, it may ever so clearly point out the 
immediate seat of the difficulty and the remedies 
to be applied, but the particular primary cause lies 
always in that fatal peculiarity of the gold-hunting, 
gold-worshipping human family against which 
common sense and science are equally puny and 
powerless." 2^ If the passion of the haste to be 
rich operates, as has been here set forth, to upset 
the individual judgment, destroy experience, sup- 
press proper consideration of risk and dishonesty, 
and force economic activity along unwise lines, it 
goes very far to account for the occurrence of eco- 
nomic crises. The crisis simply ruptures untena- 
ble conditions and reduces valuations to their 
proper level.^^ Hence, in a certain sense, the crisis 
may be said to be not only inevitable but servicea- 
ble, inasmuch as it performs a necessary work in 
readjusting economic forecasts to reality .^^ 

In the crisis may be found a new set of psychi- 
cal phenomena which it is of interest to indicate 
briefly before passing to the question of remedies. 
In contrast to the activity and optimism of the pre- 

2^ Neuwirth, " Speculationskrisis von 1873," Kap, V, pp. 312, 313. 

^ This is tersely expressed by Horace White : " The want of 
confidence which upsets commercial calculations and brings on a 
crisis is the disturbance or rupture of a commonly received opinion 
that fifty cents' worth of goods are equal to a dollar in gold." — 
Lalor, Article " Commercial Crises," Vol. I, p. 529. 

31 See note No. 16. 

207 



ECONOMIC CRISES 

crisis period there may be found in, and subsequent 
to the crisis a very deep f eeHng of depression and 
a very general lassitude. The change from one 
condition to another may be made with great rapid- 
ity because the mechanism of trade, and especially 
of currency, suddenly turns the full force of the 
competitive impulse in a reverse direction, and in- 
tensifies it, inasmuch as the struggle to save prop- 
erty in danger of loss may be more severe than the 
primary struggle to secure it. " The indiscretion 
of the period of business expansion, the luxurious 
and extravagant life based upon fictitious profits, 
and the wild chase of speculation are transformed 
in the crises into an oppressive anxiety, a sharp 
reduction of expenditures, even in cases where not 
necessary, and a critical, suspicious attitude toward 
the advancing of capital, even against the best of 
security. The entire nation suffers the aches and 
pains of sobering up after its intoxication and the 
subjective forces fail to facilitate the process of 
recuperation." ^^ 

Psychologists tell us that a state of emotion is 
only gradually created or subdued. It is reason- 
able to think that a state of social excitement is 
more gradual in its origin and subsidence than are 
states of individual emotion. The excitement 
which accompanies the rapid growth of trade is 
in the crisis transformed in character and intensi- 
fied to the highest pitch. While an emotion is 

82 Oechelhauser, " Die Wirthschaftliche Krisis," pp. 84, 85. 
208 



THE PSYCHOLOGY OF CRISES 

only gradually subdued, it may be easily trans- 
ferred from one feeling to another. " The feeling 
of an enraged people cannot at once, in the 
absence of a victim, be soothed or appeased ; it 
may be diverted into a safe or harmless channel ; 
or some altogether new emotion may be called 
into being, by means of an adequate occasion, as, 
for example, something to awaken the sentiment 
of pride." ^ The transfer of emotion from one 
feeling to another is particularly easy when the 
second is entirely opposite to the first in character. 
The passage from smiles to tears is proverbially 
easy. Such a jump from the top of the scale 
of feelings to the bottom as is witnessed during 
the crisis corresponds to the general law of 
change in feeling and is a manifestation of the 
social law called by Schaffle the " law of con- 
trast." ^4 

Other transfers of feeling besides that to a 
diametrically opposed feeling are possible. It is 
interesting to note that the emotions which have 
been generated by speculative excitement and 
intensified by panic depressions have been fre- 
quently transferred to religious subjects and have, 
in the United States at certain times, given rise 

23 Alexander Bain, "The Emotions and the Will," p. 43. 

3* *' If we soar above the normal business level at one time, we 
shall certainly fall below it at another; and the higher the flight, 
the more rapid and great will be the descent. The greatest panics 
are always preceded by the most intense activity and speculation." 
— Henry Wood, "Natural Law in the Business World," pp. 175, 
176. 

209 



ECONOMIC CRISES 

to remarkable revivals of religion following close 
upon the heels of panics.^^ 

35 Evidence of the recognition of this connection is abundant in 
contemporary religious literature. (See E. P. Whipple, " Outlooks 
on Society, Literature, and Politics," pp. 12 and others.) It is 
only reasonable that the destruction of temporal prospects should 
turn the mind to ambitions of another character. 

The history of the extraordinary revival movement of 1857 con- 
nects it immediately with the crisis of that year. A few extracts 
from a contemporary account will serve to explain this. " It was 
in October of this year (1857) that Mr. Lamphier, a missionary of 
the Dutch Reformed Church, thought, in his own heart, that an 
hour of daily prayer would bring consolation to afflicted business 
men." In a few weeks those holding the meetings were astonished 
to find the crowds growing too large for the buildings. The Metho- 
dist Church on John Street and the Dutch Reformed Church on 
Fulton Street were opened daily. Next, Burton's theatre was hired, 
and throughout the winter noonday prayer-meetings were held at 
numerous places in the city. Even the firemen and policemen held 
their prayer-meetings, so that we may feel perfectly assured of the 
truth of what the writer says when he adds, '* It is doubtful whether 
under heaven was seen such a sight as went on in the city of New 
York in the winter and spring of the year 1857-58." "From 
New York as a centre, the mysterious influence spread abroad till it 
penetrated all New England in the East, southward as far as "Vir- 
ginia, and even beyond, westward to Buffalo, Cincinnati, Chicago, 
St. Louis." — "The Galaxy," "Great Awakenings," Vol. VI, pp. 
388, 389. A very significant peculiarity of this movement, and one 
which caused much mystification, was its spontaneity {pp. cit., 
p. 390). If we recall the ease with which emotions may be trans- 
ferred this difficulty solves itself. 

Dr. Storrs, the president of the American Board, said, in an 
address delivered at Madison, Wis., before the Board, on October 
12, 1894, "You say how is it in our time as contrasted with 1857? 
God for two years has been grinding our communities under the 
pressure of commercial disease and distress, and He has been un- 
able — reverently be it said — to grind them down into a position 
of carelessness of the world and of penitent prayerfulness, or. rich 
210 



THE PSYCHOLOGY OF CRISES 

We may conclude that the depression of the 
period subsequent to a crisis is due, first of all, to 
the excitement created by business prospects prior 
to the crisis, and that this excitement is not im- 
mediately extinguished in the crisis, but is altered 
in form. Its strength is increased by the refresh- 
ment of feeling which comes from a change in the 
nature of the interest presented to the mind. As 
James Sully says, ** Pain and pleasure alike are 
heightened or intensified, or have their disagree- 
able or agreeable side emphasized, by a transition 
from and contrast to the opposite phase of feel- 
ing."^ Finally, this depression is chiefly due to 
the feeling naturally generated by the realization 
of loss. In the measure that one's interests have 
been concentrated upon business will the destruc- 
tion of business prospects leave the mind confused, 
bereft of any serious or sufficient purpose, liter- 
ally ''aimless," and hence despondent. As the 
depression of the post-crisis period wears away 
and a normal condition of business is estabHshed, 

revivals vpould have followed as they did in '57." — "Wisconsin 
State Journal," October 13, 1894. The explanation of this is that 
before the appearance of the crisis of 1893 ^^e sails of business 
were closely trimmed, and no such intense excitement accompanied 
the crisis as was experienced in 1857, when the crash came as the 
result of the reckless speculation of the fifties. Cf. Albert C. 
Stevens, "Phenomenal Aspects of the Financial Crisis," "Forum," 
Vol. XVI, September, 1893. 

What feeling there was generated in 1893 and during the sub- 
sequent hard times found vent in the McKinley-Bryan presidential 
campaign. 

36 James Sully, "The Human Mind," Vol. II, p. 29. 

211 



ECONOMIC CRISES 

the end of the crisis cycle is reached and the way 
is cleared for the first stirrings of enterprise and 
the first promptings of hope which herald the 
beginning of a new cycle. 

The discussion of remedies for the conditions 
which have been occupying our attention is pecul- 
iarly difficult, since the subjective forces in ques- 
tion are difficult to change or to bring under 
permanent subjection. The first thing which sug- 
gests itself is education. A certain kind of educa- 
tion has been making rapid strides of recent years, 
but it is open to question whether we are not still 
greatly in need of an education adapted to give 
clear ideas concerning the duties and responsibil- 
ities incident to living in a social state like that 
prevailing at present. 

For the education of business men a technical 
training is not sufficient. The president of a suc- 
cessful college of mines says that disastrous mis- 
takes probably occur in the practice of a mining 
engineer oftener through ignorance of the petro- 
graphical and geological relations of the ore de- 
posits in question than from lack of engineering 
or metallurgical skill. In the same spirit, we may 
say that the graver afflictions of industry come 
oftener from ignorance of economic science than 
from incapacity to solve the technical problems 
of industry. The technical education attempts to 
show one how to pass his competitors, but it does 
not open an intellectual horizon wide enough to 

212 



THE PSYCHOLOGY OF CRISES 

enable one to see how in the struggle of individuals 
all may be defeated because of the imperfection 
of the general industrial system. There is, among 
business men, often a lack of a comprehensive 
mental life, of a broad, sane vision of the whole 
of society, or even of the whole of industry. It is 
important that business men should be acquainted 
with the larger aspects of business as set forth in 
political economy.^" The trouble often is, as Mr. 
Whipple observed concerning the crisis of 1857, 
that merchants become political economists, not 
when their obligations are incurred, but when they 
have matured.^^ Judgment, resting as it does upon 
experience, cannot be accurate until the mind has 
long been storing up the materials for it in unbiassed 
observation and thinking.^^ Education is to be 
recommended for its effect in stimulating individ- 
ual self-confidence^^ and independent thinking, and 

^7 Cf. Holtzendorff, ** Oeffentliche Meinung," pp. 132-144. 

*8 " Outlooks on Society, Literature, and Politics," " Essay on 
Panics and Investments." It would be difficult to state better than 
Mr. Whipple has done in this essay the moral aspects of crises. 
See especially pp. 23, 24. 

39 " It has been a frequent remark in the course of our exposi- 
tion of the mind that for prudential forethought, and for sympathy 
alike, there is needed an effective recollection of pleasures and 
pains." — Bain, op. cit., p. 113. 

io " A merchant must not only have confidence in those around 
him, but also in hi?)iself. Confidence in his own powers of judgment 
will render him prudent in husbanding his resources, calm in the 
midst of speculation and excitement, and firm of purpose under 
difficulty. In this important particular many are wanting: they 
have not sufficient confidence in themselves to think or act inde- 
pendently, but are led by the example and guided by the opinion 
213 



ECONOMIC CRISES 

hence for its tendency to check dangerous vagaries 
of popular feehng.*! To effect these purposes, the 
progress of culture must be very general. A con- 
servative, clear-seeing individual here and there 
will not suffice. It is necessary to cultivate such 
a general spirit of solidity as shall express itself 
effectively through public opinion and general 
practice and be capable of repressing bad indus- 
trial symptoms before they have gained headway. 
A quotation from Mr. John Mills, whose work was 
mentioned at the opening of this chapter, is here 
in place. " Educate indeed as we may, credit will 
always fulfil its own law of growth ; and, as you 
cannot endow all men with caution and conscience, 
the growth will still tend, at intervals, to degenerate 

of their neighbors; and while so doing they commit actions as 
rash as jumping from a railway carriage or rushing from a crowded 
building on the first cry of danger. Unaccustomed to exercise 
their judgment, they give way to the first alarm without examining 
its cause; an unaccountable tremor seizes them and renders them 
deaf to reason; a natural anxiety gives way to overwhelming fear, 
and they insure the result they are most anxious to avoid — a com- 
mercial panic! " — Callander, "The Commercial Crises of 1857," 
p. 10. 

41 Adam Smith, speaking of what he calls " inferior ranks of 
people," says, " The more they are instructed, the less liable they 
are to the delusions of enthusiasm and superstition, which, among 
ignorant nations, frequently occasion the most dreadful disorders." 
— " Wealth of Nations," Bk. V, Part III, Art. II, Sec. 60. See also 
Bk. V, Part III, Art. Ill, Sec. 14, where he says, " Science is the 
great antidote to the poison of enthusiasm and superstition." 
Taine, in his " Ancient Regime," writes somewhat pessimistically 
of the state of reason, which he says is at best but an unstable 
equilibrium. Bk. Ill, Ch. IV (translated by Duran, 1876), pp. 
238, 239. 

214 



THE PSYCHOLOGY OF CRISES 

into a critical rankness ; but it is very sure that, to 
the extent in which you increase the average intel- 
ligence and elevate the average moral tone, you 
cooperate with the conservative action of economic 
law on the equilibrium of Credit and Capital. It 
is the liability to an ignorant speculative excite- 
ment, and a willingness to take immoral risks, 
which ultimately put the growth of Credit beyond 
the control of the price of loan capital. Diminish 
those, and the cycle may then expand beyond its 
customary decade." ^^ If crises rest ultimately, as 
many think, upon a self-interest so unduly devel- 
oped as to shut out a proper regard for the social 
side of economic life, and if this is contributed to 
by a weakness which permits the abuse of the 
trust imposed by credit, then true reform must 
come through the slow processes of character 
building. 

Since it has been shown that an undue concen- 
tration of interest upon economic matters begets 
distorted individual judgments and feverish and 
fatuous social struggles for wealth, it is desirable, 
by means of education or otherwise, to widen the 
range of social interests. If the proof that an 
age given over to the production of wealth loses 
many of the higher pleasures of social and indi- 
vidual life, and, even in economic affairs, deceives 
itself because of the wasteful and unsatisfactory 
character of wealth consumption, when the arts 
of consumption are neglected, does not constitute 

*2 " Credit Cycles," p. 39. 
215 



ECONOMIC CRISES 

a convincing argument, then it may be proven that 
such an age falls short of being even a perfect 
producer of wealth. To avoid the ill effects of an 
undue concentration of mind, we must broaden 
our interests. To tone down the feverish char- 
acter of industry, we must have more than a single 
aim and more than a single goal to work for. 

It has been asserted that economic interests are 
peculiarly dominant in the United States, and this 
is undoubtedly true ; but there are many reasons 
why this may be considered a passing phase of 
our national evolution. The tempting opportu- 
nities of a new country stimulate to effort. In the 
founding of a settlement, material interests must 
of necessity be first considered. A relatively 
unorganized society, in which wealth lies at hand 
as the most convenient criterion of social worth, 
stimulates the socially ambitious to secure wealth for 
an ulterior purpose. Professor Hugo Miinsterberg 
says : ** The American business man hunts success 
very energetically, but he does not care for money 
itself. He wants a fortune because, in a country 
without titles and orders, wealth is the only meas- 
ure of worth." ^^ As our country becomes older, 

*3 This is a discriminating statement, conveying quite a different 
idea from the assertion of De Tocqueville, who said, " A native 
of the United States clings to this world's goods as if he were 
certain never to die; and he is so hasty in grasping at all within 
his reach that one would suppose he was constantly afraid of not 
living long enough to enjoy them." — "Democracy in America" 
(Boston, 1873), Vol. II, Bk. II, Ch. XIII, p. 163. Cf. E. P. Whip- 
ple, " Outlooks on Society, Literature, and Politics," p. 8. 
216 



THE PSYCHOLOGY OF CRISES 

and the most attractive opportunities are taken, 
as leisure for something besides wealth getting 
is afforded, and as, in consequence of this, another 
criterion besides wealth is used in determining 
social standing, we may look for a radical change 
in the characteristics of American civiHzation. 
As custom grows up to restrain enterprise, and 
the class which guards wealth supplements that 
earning it, the practices fading to crises will find 
less and less place. These economic changes may- 
be confidently expected in the United States, but 
since crises have not been limited to the United 
States, a word may be added referring to older 
countries. The industrial revolution which has 
so transformed the nature of industry during the 
last century, has permitted the older nations to 
enter upon a nev/ and unparalleled course of wealth 
production, which has for a time made them resem- 
ble new nations so far as the prominence of eco- 
nomic interests is concerned. As we look for the 
next stage of industry in the United States to 
exhibit greater conservatism and solidity, for the 
same reasons we may look for the other crises- 
suffering countries of the world to assume again 
the normal characteristics of countries old in the 
economic sense. 

RESUME 

I. The psychology of crises, — review of some theories. 

(a) The crisis cycle presents a succession of mental 
states. 

217 



ECONOMIC CRISES 

(b) Recurring crises indicate an error of psychic forces. 

(c) A powerful impulse will distort mental states. 
(^) Crises result from undue dominance of the im- 
pulse to secure wealth. 

II. Individual effects of a powerful impulse. 

1. Distorts recollection. 

{a) Modifies force of the original impression. 

(b) Mental states and external causes. 

(c) Selection of details in recalling. 

(d) Undesirable recollections repressed. 

2. Distorts anticipation. 

(a) Anticipation free from correctives. 
{b) Optimism by contrast. 

{c) Imagination ruled by desires. 

3. Economic practice. 

(«) The optimistic become leaders. 

(b) Undue concentration of interest producing 

strong emotion promotes errors of prac- 
tice. 

(<:) A broadening of interest demanded. 

{d) Character of business to-day. 

III. Social Psychology. 

1 . Effect of actions upon feeling. 

Competition requires the simulation of success. 

2. Belief in testimony. 

{a) Effects of the money test of worth. 
(J?) Growth of increments of error in an asso- 
ciated body of traders. 

3. Sympathy — the compactness of trading commu- 

nities. 

IV. The reaction of the panic. 

I . The intensity of feeling. 

Competition to save property. 
V. Remedies. 

Liberal education. 

Widened range of social interests lessening the im- 
portance of economic motives. 
218 



CHAPTER X 

CONCLUSION 

The more important of the theories of crises take 
up and magnify some one aspect of the subject. 
They, however, each develop a point of view 
which it is necessary to accommodate in order to 
gain a comprehensive knowledge. A crisis is cer- 
tainly a disturbance of the equilibrium between 
demand and supply. A helpful, if not a very pen- 
etrating, view of the causes of crises, may be ob- 
tained by arranging them according as they arise 
from the side of demand or supply. The organi- 
zation of industry very justly demands attention 
in connection with crises, so that the proper rela- 
tion of the size and structure of the individual busi- 
ness unit to the social industrial organism may be 
understood. The dominant change in modern pro- 
duction is due to the increased use of capital. It 
is necessary to learn what effect this has upon cri- 
ses. A still more searching study of economic ten- 
dencies comes in the consideration of the effect of 
the growth of capital power upon demand through 
its relation to the welfare of the wage-earning 
classes. Since contests over the economic theories 
involved in these studies bring in the question of 
219 



ECONOMIC CRISES 

the relation of the state to the economic life, the 
consideration of the relation of legislation to crises 
is a pertinent appendix to the above. A quite sepa- 
rate, but equally important, phase of the subject is 
the relation of the mental and moral tendencies of 
business men to crises. This study includes the 
examination of the nature of credit and speculation, 
but the psychology of crises is a much larger sub- 
ject than this and demands more attention than it 
has received. 

There can be found in the literature devoted to 
crises a sufficient amount of data to present fairly 
the more fundamental characteristics of crises. 
The chief types of rational interpretation which 
these data will permit may also be found repre- 
sented. Under these conditions it is not a particu- 
larly useful proceeding to advance a competing 
theory to add to the already long list. It is much 
more useful to attempt to knit together various 
contributions into an orderly whole, making what- 
ever additions seem necessary, with a view to sup- 
plementing and completing what has already been 
done. 

While the industrial convulsion which character- 
izes the crisis is obviously a lamentable occurrence, 
there are certain observations regarding the loss 
due to a crisis which it is desirable to set down. 
Much that is commonly reported as loss is not loss 
in the sense of destruction of utility. The railway 
system of the United States has remained practi- 
cally the same during the few years preceding the 
220 



CONCLUSION 

last crisis and the few years since. In that period, 
however, there was an immense variation in the 
selHng value of the securities which controlled prop- 
erty rights in that railway system. A decHne of 
market values is not to be understood as a loss of 
wealth in the ordinary sense, when the finances 
of an entire trading community are concerned. 
During a crisis, while goods decline in value, money 
enhances; but since values are reckoned in terms 
of money, the enhancement of the value of money 
does not offset the decline of the value of goods 
in any attempt to estimate values in terms of 
dollars and cents. Strictly speaking, what oc- 
curs is a transfer of values from certain com- 
modities to others. This transfer favors such 
persons as possess wealth in money or in obli- 
gations which stipulate the payment of certain 
sums of money.^ 

The direct and indirect social effects of crises 
are numerous, but too numerous and important to 
be taken up in the present work. There are also 
important relations between crises and various 
economic problems which are appropriate subjects 
for the attention of students of economic problems. 
There is no question but that crises promote rather 

1 Hence one hears the expression " debts have grown heavier." 
Senator Chandler of New Hampshire said in the Senate, February 
i6, 1897: "Shrinkage in prices has been most serious since 1890. 
The value of property in the United States was ^65,000,000,000 in 
1890; now it is estimated at ^49,000,000,000, a shrinkage of twenty- 
five per cent, since 1890. Our debts have not shrunk, but have 
remained an inexorable charge." 

221 



ECONOMIC CRISES 

than diminish inequahties ii; the distribution of 
wealth, for in the extremity of the man of ordinary- 
means hes the opportunity of men of very large 
wealth. Crises intensify the real meaning of 
variations in wealth by reducing large numbers of 
people to a condition of want which gives a new 
meaning to the difference between large and 
small wealth. 

Anything which increases the uncertainty of 
business tends to break down habits of thrift. The 
distress of persons who in ordinary seasons are 
self-supporting, and who are in search of work, is 
well calculated to draw out the benevolence of 
the charitable. The crisis teaches to many per- 
sons the fatal secret that they can live without 
work. 

A further effect of uncertain business conditions 
is the growth of the " captain of industry " or the 
one-man-power system. Slow-moving, delibera- 
tive forms of business management, the expansion 
of which is much to be desired for the sake of 
enlarging the number of persons in responsible 
positions, are at a disadvantage. 

The coming of a crisis may not greatly injure 
a sound economic organism, but if that organism 
be diseased, a crisis will intensify its evils. A 
marked increase in certain kinds of crime occurs 
during a crisis.^ The decline of wages renders 
necessary woman and child labor, a decline of 

2 Ellis, "The Criminal," New York, 1890, p. 299; Max Haus- 
hofer, " Lehr und Handbuch der Statistik," 2 Aufl., p. 470. 
222 



CONCLUSION 

profits increases the evasions of factory acts. 
Unemployment is a conspicuous result of crises, 
and the whole economy of production, which is 
built up in periods of tranquillity through the 
division of labor, is marred by the downward dis- 
placement of wage-earners to the performance of 
tasks beneath their ability. The incompetent are, 
of course, first eliminated, but many misfits in the 
relation of workman to task result from the fever- 
ish search for work which is kept up during a 
crisis. Strikes, lockouts, and industrial disputes 
readily grow out of such conditions, while all types 
of industrial experiments, such as cooperation and 
profit-sharing, aiming to inaugurate reforms, suffer 
distress. Then it is that the financial machinery 
of government receives criticism, and that eco- 
nomic questions are dragged out for ill-advised 
political discussion and hasty legislation. 

These things emphasize the reality of social 
solidarity. And this suggests that therais a soli- 
darity in the progress of scientific thought, as well 
as in economic conditions. Progress toward a 
more systematic knowledge of crises will come 
chiefly as the result of general advances in eco- 
nomic science. The extinguishment of crises will 
come through the progress of general economic 
evolution, rather than as the result of the applica- 
tion of specific remedies. 



223 



BIBLIOGRAPHY 



I. GENERAL WORKS 

*^ Hadley, A. T., article " Commercial Crises " in " Johnson's 

Universal Cyclopaedia" (Ed. of 1895). 

Vol. II, p. 423 ff. Brief historical and theoretical discussion. 
" Herkner, H., article "Krisen" in Conrad's " Handworterbuch 

der Staatswissenschaften." Bd. IV, p. 891 ff. Jena, 

1892. 

Best single article upon the subject of crises. 
Hyndman, Henry Mayers, " Commercial Crises of the Nine- 
teenth Century." London, 1892. 

Social Science Series, Vol. L. 
Juglar, Clement, " Crises Commerciales et de leur retour 

pdriodique en France, Angleterre, et aux Etats-Unis." 

2d Ed., Paris, 1889. 

Special use is made of the accounts of the Bank of France. 
" Crises Commerciales," in Leon Say's " Nouveau Dic- 

tionnaire d'Economie Politique." Tome L Paris, 1891. 
•^ articles " Des Crises Commerciales et Monetaires de 

1800 k 1857," in "Journal des Economistes," Tome XIV, 

1856. 
Pages 14 fF. and p. 253 ff. Presents in outline the points 

treated more at length in Juglar's book. It traces for France 

the connection between crises and population, price, savings, 

speculation, the general condition of the market, and social and 

political relations. 
Laveleye, Emile Louis Victor de, " La Marche Mondtaire et 

ses crises depuis cinquante ans." Paris, 1865. Also see 

"Revue des Deux Mondes," January and February, 1865. 

Macleod, Henry Dunning, article "Commercial Crises," in 

^ Macleod's " Dictionary of Political Economy." London, 

1863. 

Q 225 



BIBLIOGRAPHY 

^ Marshall, Alfred, "Economics of Industry." 1st Ed. London, 
1891. Especially Bk. Ill, Ch. I. 

The description of crises there contained is quoted in F. A. 
Walker's " Political Economy " (advanced course) pp. 175-177, 
3d Ed. New York, 1888. 
J Pownall, G. H., article " Crises, Commercial and Financial," 
in Palgrave's "Dictionary of Political Economy." Vol. I. 
London, 1892. 
Schaffle, Albert E. Friedrich, " Bau und Leben des sozialen 
Korpers." 4 Vols. Tiibingen, 1881. 
Bd. I, p. 344; II, 431 ff. and 445 ff. 

^ >. " Gesammelte Aufsatze," Bd. II, pp. 23-137, Tubingen, 

^ 1886, a part of which appeared as article "Zur Lehre 

von den Handelskrisen," in " Zeitschrift fiir die gesammte 
Staatswissenschaft," Bd. XIV, Tiibingen, 1858, and as 
article "Der grosse Borsenkrach des Jahres 1873," i^i 
Bd. XXX, Tubingen, 1874. 

An important contribution to the subject. Among other things, 
the fluctuation in the price of the precious metals is treated with 
reference to crises. 

= article " Handelspolitik," in Bluntschli's " Deutsches 

Staatsworterbuch," Bd. IV. 11 Vols. Stuttgart, 1857-70. 

" Das Gesellschaftliche System der Menschlichen Wirth- 

schaft." 3 Aufl. 2 Vols. Tiibingen, 1873. 
^. Wagner, Adolph, article "Krisen," in Rentzsch's " Hand- 
*" worterbuch der Volkswirthschaftslehre." 2 Aufl. Leip- 

zig, 1870. 

An especially valuable article. The influence of credit is 
emphasized. 
White, Horace, article "Commercial Crises," in Lalor's 
" Cyclopaedia of Political Science, Economy and Political 
History of the United States." 3 Vols. Chicago, 1884. 
Wirth, Maximilian Wilhelm Gottlob, " Geschichte der Han- 
delskrisen." 4 Aufl. Frankfurt a/M., 1890. 
The standard historical work. 



226 



BIBLIOGRAPHY 



II. THE ECONOMIC EQUILIBRIUM 

Gamier, M. Joseph, " Traitd d'Economie Politique Sociale ou 

Industrielle." Paris, 1880. 

Especially Sees. 363, 579, et seq. Follows the presentation of 

Max Wirth. 
Nasse, E., article " Ueber die Verhlitung der Produktions- ^ 

krisen durch staatliche Flirsorge," in "Jahrbuch fiir 

Gesetzgebung, Verwaltung und Volkswirthschaft im 

deutschen Reich.'" N. F., Bd. III. Leipzig, 1879. 
Roscher, Wilhelm, ''■ Zur Lehre von den Absatzkrisen " (first 

published in 1849), in" Ansichten der Volkswirthschaft." 

3 Aufl. Leipzig u. Heidelberg, 1878. 

Chief authority of the equilibrium theory. 
" Nationalokonomik des Handels und Gewerbfleisses." '- 

2 Aufl. Stuttgart, 1881. Being Bd. Ill of " System der 

Volkswirthschaft." 

Especially Abtheilung II, Kap. XI. 



III. THE ORGANIZATION OF INDUSTRY 

Reference may be made to much of the literature of modern social- 
ism. Upon the size of business units see also section (c) of the 
bibliography of " Crises and Legislation." 

Bebel, " Die Frau und der Socialismus." 10 Aufl. Stuttgart, 

1890. 

Especially p. 235 ff. 
Engels, Friedrich, "Herrn E. Dlihring's Umwalzung der 

Wissenschaft." 2 Aufl. Zurich, 1886. 
" Socialism, Utopian and Scientific " (Ed. by Edw. 

Aveling). London, 1892. Social Science Series No. 56. 
Contains a fine description of the phases through which business 

passes in a crisis period. 
Engels-Marx, " Das Kommunistische Manifest." 4 Aufl. 

London (German Cooperative Publishing Co.), 1890. 
Kautsky, K., " Marx's okonomische Lehren." Stuttgart, 1887. 

Pages 238 ff. 
Kleinwachter, F., "Die Kartelle." Innsbruck, 1883. 



BIBLIOGRAPHY 

Lexis, article " Handel," in Schonberg's " Handbuch." 2 Aufl. 
Tubingen, 1886. 
Especially Bd. I, pp. 697-734, and Bd. II, pp. 734-737. 

Schultze-Gavernitz, " Grossbetrieb ein wirthschaftlicher und 
socialer Fortschritt." Leipzig, 1892. 

Smart, William, article " The Dislocations of Industry," in 
''Contemporary Review," Vol. LIII, May, 1888. 

Watchel, Friedrich, " Die Versicherung der Actienrente, Ein 
Praservativ gegen Borsen- und Handels-Krisen." Leip- 
zig, 1874. 



IV. CRISES AND THE PROBLEM OF CAPITAL 

Aldis, W. Steadman, article " Over-production " in the " Con- 
temporary Review," Vol. XXXV. London, April, 1879. 

Beaumont, Henri de, article " Des Fetes comme Remede k la 
Crise Commerciale," in "Journal des Economistes," Feb- 
ruary, 1886. Sdrie 4, Tome XXXIII. 
Emphasizes expenditure as necessary to maintain trade. 

Bernhardi, Th., " Versuch einer Kritik der Griinde, die fiir 
gross und klein Grundeigentum angefUhrt werden." St. 
Petersburg, 1849. 
Sec. 15. Reviews the classical doctrines of profits and surplus. 

Bowen, Francis, "American Political Economy." 3d Ed. 
New York, 1863. 
Particularly Chs. XVII and XXIII. 

Chalmers, Thomas, "On Political Economy in Connection 
with the Moral State and Moral Prospects of Society." 
2d Ed. Glasgow, 1832. 
Chs. Ill and V. Argues for the possibility of a general glut. 

Courcelle-Seneuil, Jean Gustave, " Traite Theorique et Pratique 
d'Economie Politique." Paris, 1858. 
Tome I, " Partie Theorique ou Ploutologie." 

Crocker, Uriel H., " Excessive Saving a Cause oi Commercial 
Distress : being a Series of Assaults upon Accepted Prin- 
ciples of Political Economy." Boston, 1884. 

"The Causes of Hard Times." Boston, 1895. 

228 



BIBLIOGRAPHY 

D'Avis, article ^' Die wirthschaftliche Ueberproduktion und 
die Mittle zu ihre Abhiilfe," in "Conrad's Jahrbiicher," 
1888, Bd. XVII, N. F., pp. 465-490. 

Ely, Richard T., "Outlines of Economics" (College Edition). 
New York, 1893. 

Guyot, Yves, "Principles of Social Economy" (Trans, by 
C. H. Lippington). 2d Ed. London and New York, 1892. 

Hawley, Fr. B., article " The Rationale of Panics," in " National 
Quarterly Review," October, 1879. 

article " The Ratio of Capital to Consumption," in " Na- 
tional Quarterly Review," Vol. XXXIX, July, 1879. 

"Capital and Population." New York, 1882. 

Chs. 11, III, IV, and V. 

Hobson, John A., "The Evolution of Modern Capitalism; a 
Study of Machine Production." London, 1894. 
Cli. VII. Presents the modern doctrine of saving. 

McCuUoch, John Ramsay, " The Principles of Political Econ- 
omy." London, 1870. 
Held Say's doctrine of the impossibility of a general glut. 

Malthus, T. R., " Principles of Political Economy considered 
with a View to their Practical Application." 2d Ed. 
London, 1836. 

Bk. I, Ch. V, and Bk. II, Ch. I. Chief opponent of Say. 
Held the possibility of a general glut. 

Moffat, R. S., "The Economy of Consumption; an Omitted 
Chapter in Political Economy." London, 1878. 

Mummery, A. F., and J. A. Hobson, " The Physiology of In- 
dustry ; an Exposure of Certain Fallacies in Existing 
Theories of Economics." London, 1889. 

Rae, John, " Statement of Some New Principles on the Subject 
of Political Economy, exposing the Fallacies of the 
System of Free Trade and of Some Other Doctrines 
maintained in the 'Wealth of Nations.^" Boston, 1834. 
Bk. II, first six chapters. 

Rau, Karl Heinrich, " Malthus und Say liber die Ursachen der 
jetzigen Handelsstockung." Hamburg, 1821. 

Comprises selections from the principal parts of Malthus' 
" Prin. of Pol. Econ.," London, 1820, and Say's " Open Letters to 
229 



BIBLIOGRAPHY 

Malthus," Paris, 1820, together with a comment upon the arguments 
presented. Rau leans toward Malthus' position. 
Robertson, John M., " The Fallacy of Saving." London, 1892. 
Social Science Series No. 52. 
Agrees in the main with Hobson. 

Say, Jean-Baptiste, " Cours Complet d'Economie Politique 
Pratique." 2d Ed. Paris, 1840. 
Part III, Ch. XXXI. Developed the theory of the market. 

" Lettres k Malthus sur differents sujets d'economie poli- 
tique, notamment sur ies causes de la stagnation generale 
du commerce." Paris, 1820. 

Simonde de Sismondi, Jean Charles Leonard, "Nouveaux 
Principes d'Economie Politique ou de la Richesse dans 
ses Rapports avec la Population." 2d Ed. Paris, 1827. 
Liv. II,Chs. IV, V, andVI. 

Wells, David Ames, article " The Great Depression of Trade," 
in the " Contemporary Review," Vol LIT, August and 
September, 1887. 

V. THE WAGES SYSTEM 

Part of the literature given in the previous section may be consulted. 
Adler, Georg, "Rodbertus, eine socialokonomische Studie." 

Leipzig, 1884. 

A very valuable essay. 
Bahr, Hermann, "Rodbertus' Theorie der Absatzkrise." 

Wieh, 1884. 

Reprint of an address. 
Brentano, Ludwig Joseph (called Lujo), article " Die Arbeiter 

und die Produktionskrisen," in " Jahrbuch fiir Gesetzge- 

bung, Verwaltung und Volkswirthschaft im deutschen 

Reich." Bd. II, N. F., 1878. 

Contains his plan for the insurance of the wage-earning classes 

against crises. This plan is in part repeated in several of his 

other works. 

" Der Arbeiter-Versicherungszwang." Berlin, 1881. 

" Ueber die Ursachen der heutigen socialen Noth. Ein 

Beitrag zur Morphologic der Volkswirthschaft." 2d Aufl. 

Leipzig, 1889. 

230 



BIBLIOGRAPHY 

" Die Arbeiterversicherung gemaiss der heutigen Wirth- 

schaftsordnung ; geschichtliche und okonomische Stu- 
dien.'" Leipzig, 1879. 

" Arbeitsverhaltniss gemass dem heutigen Rechte."" 

Leipzig, 1876. Translated by Sherman, — "The Re- 
lation of Labor to the Law of To-day." New York, 1891 . 

George, Henry, "Progress and Poverty." Bk. V, Ch, L 
4th Ed. New York, 1880. 

Hertzka, Theodor, " Die Gesetze der sozialen Entwickelung." 
Leipzig, 1886. 
Bk. I, Kap. VIII. " Die Ueberproduktion." 

"Eine Reise nach Freiland." Leipzig, 1893. 

Kap. X. " Unmoglichkeit von Krisen in Freiland." A social 
Utopia. 
^ Hobson, John A., article "The Economic Cause of Unemploy- 
ment." " Contemporary Review," Vol. LXVII, p. 744 fF. 

Mario, Karl (Karl Georg Winkelblech), " Untersuchungen 
iiber die Organisation der Arbeit oder System der Welt- 
okonomie." 2 Aufl. 4 Bde. Tubingen, 1885. 
Especially Bd. I. 

Nicholson, J. Shield, " The Effects of Machinery on Wages." 
Social Science Series No. 54. 2d Ed. London, 1892. 

Osgood, H. L., article "Scientific Socialism" (Rodbertus) in 
"Political Science Quarterly," Vol. I, 1886. 

Owen, Robert, " Observations on the Effects of the Manufac- 
turing System." London, 1817. 

Report. Part I of the Twenty-Fourth Annual, entitled 
"Unemployment." Bureau of Statistics of Labor of 
Massachusetts. Boston, March, 1894. 

Rodbertus- Jagetzow, Johann Karl, "Capital," being "Vierter 
sozialer Brief an von Kirchmann" (Ed. by A. Wagner 
and Th. Kozak). Berlin, 1885. 

The crisis theory of Rodbertus is frequently repeated in his 
various works. 

" Zur Erkenntniss unserer staatswirthschaftlichen Zu- 

stande." Neubrandenburg and Friedland, 1842. 

" Zur Beleuchtung der sozialen Frage," being "Erster und 

dritter sozialer Brief an von Kirchmann." Berlin, 1885. 
231 



BIBLIOGRAPHY 

" Zweiter sozialer Brief an von Kirchmann." Berlin, 1 890. 

"Zur Erklarung und Abhlilfe der heutigen Creditnoth 

des Grundbesitzes." 2 Aufl. 2 Bde. Jena, 1876. 

" Kleine Schriften," especially " Die Handelskrisen der 

Grundbesitzer." Berlin, 1890. 

Sargent, William L., "Robert Owen and his Social Phi- 
losophy." London, i860. 

Villeneuve-Bargemont, Alban de, '-^ Economic Politique Chr6- 
tienne, ou recherches sur la nature et les causes du Pau- 
perisme en France et en Europe." Paris, 1834. 
Tome I, Ch. XII. " Des Machines." 

Zuns, " Einiges uber Rodbertus." Berlin, 1883. 

VI. CRISES AND LEGISLATION 
{a) Bank Legislation 

Bonnet, Victor, article " La Crise Mondtaire de 1863-64 et ses 

Origines," in "Revue des Deux Mondes," November 15, 

1865. 

Favors a single bank of note issue. 

" Question Financiere a propos des crises." Paris, 1859. 

Buchanan, President, "Message," December 8, 1857. Sen. 

Ex. Doc. No. II, 35th Cong., ist Session. Washington, 

1858. 
Carey, Henry Charles, " The Credit System in France, Great 

Britain, and the United States." Philadelphia, 1838. 

Recommends freedom in banking. Highly praised by Coquelin. 
Clement, Ambroise, article "Des Crises Commerciales," in 

"Journal des Economistes," Tome XVII, January, 1858. 

Favors freedom of banking. 

"La Crise Economique." Paris (Guillaumin) . 

Coquelin, Charles, article "Les Crises Commerciales et la 

Liberte des Banques," in " Revue des Deux Mondes " 

(Nouvelle Serie), Tome XXIV, November i, 1848. 

One of the chief exponents of the theory of freedom in bank issue. 
Courcelle-Seneuil, Jean Gustave, article "De la Liberte des 

Banques," in "Journal des Economistes," 2me S6rie, 

Tome XLII, May 15, 1864, and Tome XLIII, July 15. 
232 



BIBLIOGRAPHY 

Favors competing banks of issue, admitting, however, that, as 
banks aid progress in wealth, they assist in bringing about more 
frequent crises. 

Guthrie, George, " Bank Monopoly, the Cause of Commercial 
Crises.'" Edinburgh, 1864. 

Mannequin, Th., article "De la Libert^ des Banques," in 
"Journal des Economistes," 2me Sdrie, Tome XLI, 1864. 
Champion of freedom in banking. 

Roscher, Wilhelm, " Nationalokonomik des Handels und 
Gewerbfleisses " (especially Sees. 69-70). 2 Aufl. Stutt- 
gart, 1887. 

Wagner, Adolph, " Finanzwissenschaft." 3 Aufl. Leipzig, 1883. ^s^-^ 
Especially Buch III, Sees. 259-262 in Bd. I. Best resum6 of 
the arguments for and against freedom of bank issue. Con- 
tains extensive references to the literature of the subject. 

" System der Zettelbankpolitik." 2 Aufl. Freiburg, 1873. 

Wirth, Maximilian Wilhelm Gottlob, " Handbuch des Bank- 
wesens." 3 Aufl. Kbln, 1883. Being Bd. Ill of " Grund- 
ziige der National Oekonomie." 

Wolowski, L., article "Des Nouveaux Dtfbats sur les 
Banques," in " Revue des Deux Mondes," Tome LV, 
Feb. I, 1865. 

Principal champion of monopoly of bank issue by a single insti- 
tution under state control. 

" La Question des Banques." Paris, 1864, the substance 

of which was published as " Question des Banques " in 
"Journal des Economistes," 2me Serie, Tome XLI, Feb. 
15, and March 15, 1864, and Tome XLII, April 15. 

Contains an extensive collection of documents bearing upon 
the subject. 

{b) The Peel Bank Act of 1844 

General reference is made to much of the literature given under the 
preceding heading. 

Baring, Alexander (Baron Ashburton), "The Financial and 
Commercial Crises Considered." 3d Ed. London, 1847. 
Locates the cause oi crises in disturbances of the currency. 
Opposed to the Peel Bank Act. 

233 



BIBLIOGRAPHY 

Baxter, Robert, "Panic of 1866, with its Lessons on the Cur- 
rency Act." London, 1866. 

Bullion Report of 18 10. " Report of English Parliamentary 
Commission." Text to be found in Appendix to Sumner's 
" History of American Currency." New York, 1874. 

Cairnes, John Elliott, " An Examination into the Principles of 
Currency involved in the Bank Charter Act of 1844." 
Dublin, 1856. 
Argues against the Peel Bank Act. Is highly praised by Tooke. 

Fullarton, John, " On the Regulation of Currencies, being an 
Examination of the Principles on which it is proposed to 
restrict, within a Certain Fixed Limit, the Future Issues 
on Credit of the Bank of England and of Other Banking 
Establishments throughout the Country." London, 1844. 
Pronounced one of the clearest opponents of the theory of the 
Peel Bank Act. 

Mills, John, paper, "The Bank Charter Act and the Late 
Panic," read before "National Social Science Associa- 
tion" at Manchester, Oct. 5, 1866. Published separately, 
London, 1866. 

Defends the Bank Act and claims that some broader and 
deeper cause must be found to account for the occurrences 
of crises. 

Mill, John Stuart, "Principles of Political Economy." 
American, from 5th London Ed. New York, 1882. 
Especially Bk. Ill, Ch. XXIV. 

article, " The Currency Question," in " Westminster 

Review," June, 1844. 

Overstone, (Lord) Sam. Jones Loyd, " Tracts and Other Pub- 
lications on Metallic and Paper Currency" (Ed. by 
J. R. McCulloch). London, 1858. 
Chief authority of the Currency School. 

Palmer, J. Horsley, " The Causes and Consequences of the 
Pressure upon the Money Market ; with a Statement of 
the Action of the Bank of England from ist October, 
1833, to 27th December, 1836." London, 1837. 

Tooke, Thomas, and William Newmarch, "A History of 
Price„ " 6 Vols. London, 1857. 

234 



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BIBLIOGRAPHY 

The authority of first importance upon the subject of the Peel 
Bank Act. 

Torrens, Colonel Robert, " The Principles and Practical Opera- 
tion of Sir Robert PeePs Act of 1844 explained and 
defended." 3d Ed. London, 1858. 

"A Letter to the Right Honourable Lord Viscount Mel- 
bourne, on the Causes of the Recent Derangement in the 
Money Market and on Bank Reform." 2d Ed. Lon- 
don, 1837. 

" ' The Budget,' a Series of Letters on Financial, Com- 
mercial, and Colonial Policy." London, 1844. 
Discusses the crisis of 1841-42. 

Wagner, Adolph, ''Die Geld- und Credittheorie der PeeP- 
schen Bankacte." Wien, 1862. 
The most scholarly and systematic presentation of the subject. 



(c) Miscellaneous Legislative Provisions 

General reference is made to the works given under the heading 
" Credit and Speculation." 

Anonymous, " The Profit of Panics ; showing how Financial 
Storms arise, who make Money by them, . . . and Other 
Revelations by a City Man." London, 1866. 

By the author of " Bubbles of Finance," also anonymously 
pubhshed. See under " Credit and Speculation." 

Benton, T. H., "Thirty Years' View." New York, 1854. 

Vol. II, Chs. XIII and XIV, pp. 43-56. Discussion of Bank- 
ruptcy Laws in the United States. 

Campbell, R. V., "Principles of Mercantile Law." 2d Ed. 
Edinburgh, 1890. 

Crump, Arthur, " A New Departure in the Domain of Politi- 
cal Economy." 2d Ed. London, 1881. 

Particularly Part I, Ch. IX, "The Influence of Joint Stock 
Limited Liability Companies upon Production." 

Dunscomb, S. W., "Bankruptcy; a Study in Comparative 
Legislation." Columbia College Studies in History, 
Economics, and Public Law. Vol. II, No. 2. New York, 
1893. 

235 



BIBLIOGRAPHY 

Evans, D. M., "Facts, Failures^ and Frauds; Revelations, 
Financial, Mercantile, Criminal." London, 1859. 

Grif&n, R., "Stock Exchange Securities; an Essay on the 
General Causes of Fluctuations in their Prices." London, 

1879. 
Kleinwachter, Fr., in Schonberg's "Handbuch," Bd. I, 3 

Aufl. 3 Bde. Tubingen, 1890-91. 

Especially Part I, Ch. V, Sub-division III, Sees. 27-34. Dis- 
cusses the advantages and defects of various forms of business 

undertaking. 
Oechelhauser, W., '' Die Nachteile des Aktienwesens und der 

Reform der Gesetzgebung." 1876 and 1878. 
Oliphant, Laurence, article "The Autobiography of a Joint 

Stock Company (Limited)." * Blackwood's Magazine, 

July, 1876, Vol.'cXX. 
SchafQe, Altert Eberhard Friedrich, article "Die Anwend- 

barkeit der verschiedenen Unternehmungsformen," in 

" Zeitschrift fUr die Gesammte Staatswissenschaft," Jahr- 

gang 1869. 

Best treatment of the subject of forms of business organization. 
" Verhandlungen, Die, des elften Kongresses deutscher Volks- 

wirthe," held in Mainz, September i, 2, 3, and 4, 1869. 

Report of proceedings in Faucher's " Vierteljahrsschrift 

fiir Volkswirthschaft und Kulturgeschichte," Jahrgang 

1869. Bd. in. 

Upon the subject of joint stock companies. 
"Verhandlungen, des Vereins fur Socialpolitik am 12 u. 13 
October, 1873," Bd. IV of "Schriften" des Vereins. 
Leipzig, 1874. 

Concerning joint stock companies. Contains Wagner's thirty- 
tvi^o theses. 

. VTI. PERIODICITY OF CRISES 

A few astronomical works are cited which deal especially with the 
phenomena involved in this theory. 

Banner, Samuel, "Benner's Prophecies of Future Ups and 
Downs in Prices." 3d Ed. Cincinnati, 1884. 
236 



BIBLIOGRAPHY 

Boccardo, Gerolamo, " Economia Political' 6th Ed. Turin, 
1879. 
Vol. II, pp. 127-157. 

article " La Legge de Periodicita della Crisi-Perturbazioni 

Economiche e Macchie Solari," in "Archivio di Stitis- 
tica," Anno IIL Roma, 1879. 

Carr, Nathan T., " The Sun : Its Constitution ; Its Phenomena ; 
Its Condition." New York, 1883. 
Especially Sec. 25, " Periodicity of Sun-spots." 

Carrington, R. C, "Observations of the Spots on the Sun 
from November 9, 1853, to March 24, 1861." London, 
1863. 

The author compares the frequency of sun-spots with the price 
of wheat. 

Hazen, H. A., article "Sun-spots and Predictions," in "Sci- 
ence," Vol. XVI, pp. 29-33, July 18, 1890. 

Herschel, Sir William, " Observations tending to investigate 
the Nature of the Sun, etc." Philosophical Transactions 
of the Royal Society, Vol. XCI. London, 1801. 

Page 265 ff. Contains perhaps the earliest suggestion of the 
connection between sun-spots and the variations of harvests. 

Hunter, W. W., and J. Norman Lockyer, article " Sim-spots 
and Famines," in " Nineteenth Century," November, 1877. 
Vol. 11^ pp. 583-602. Concerning periodicity of famines in India. 

Jevons, W. Stanley, "Investigations in Currency and Finance." 
London, 1884. 

Chs. I, V, VI, VII, and VIII. Mr. Jevons is mainly respon- 
sible for bringing this discussion into economic literature. 

Kedzie, J. H., "Speculations, Solar Heat, Gravitation, and 
Sun-spots." Chicago, 1886. 
Part III. 

Young, C. A., "The Sun and the Phenomena of its Atmos- 
phere," in "Half Hours with Modern Scientists." Sec- 
ond Series. New Haven, Conn., 1873. 



237 



BIBLIOGRAPHY 



VIII. CREDIT AND SPECULATION 

Reference may be made to the literature in the next section of the 
bibliography. 

Anonymous, "The Bubbles of Finance: Joint Stock Compa- 
nies, promoting of Companies, Modern Commerce, Money 

Lending, and Life Insuring," by a city man. London, 

1865. 

By the author of " Profits and Panics," also anonymously pub- 
lished (see VI (c) of this bibliography) . 
Anonymous, " Rationale of Market Fluctuations." London, 

1875. 
Anonymous, " Market Fluctuations," by a city editor. London, 

1876. 
Cohn, Gustav, article " Zeitgescbafte und Diiferenzgeschafte," 

in Hildebrand's " Jahrbucher," Bd. VII, and Bd. IX, 

1866. 
Consular Reports, Symposium on "Debts of Honor"; how 

they are considered in various countries. Vol. XLII. 

August, 1893. 
Crump, Arthur, " The Key of the London Money Market." 

6th Ed. London, 1877. 

Contains a concise review of the history of the money market 

during the last century, with tables of the accounts of the Bank of 

England. 
" Theory of Stock Exchange Speculation." London, 

1874; New York, 1887. 
American Edition edited by H. W. Rosenbaum. An accurate 

and suggestive description of speculative methods. 
Evans, D. M., " Speculative Notes and Notes on Speculation, 

Ideal and Real." London, 1859. 
Garnier, J., article "De la Nature des Operations de Bourse 

et de I'Agiotage," in " Journal des Economistes," Tome 

XLII, p. 378. Paris, 1864. 
Gibson, G. Rutledge, "Stock Exchanges of London, Paris, 

and New York; a Comparison." New York, 1889. 
Glagau, "Der Borsen- und Grlindungsschwindel in Berhn." 

Leipzig, 1873. 

238 



BIBLIOGRAPHY 

" Der Borsen- und GrUndungsschwindel in Deutschland." 

Leipzig, 1877. 
Holtzendorff, Franz von, " Wesen und Werth der Oeffentlichen 

Meinung." MUnchen, 1879. 
Hume, John F., article " The Heart of Speculation," in the 

"Forum," Vol. II, pp. 130-141, October, 1886. 

A description of stock exchange methods. 
Knies, Karl, "Credit." Being the second part of "Geld und 

Credit." 2 Aufl. Berlin, 1873-79. 
Mangoldt, Hans Karl Emil von, article " Kredit," in Bluntschli's 

"Deutsches Staatsworterbuch," Bd. VI. 
Michaelis, Otto, article " Die wirthschaftliche Rolle des Spec- 

ulationshandels," in Faucher's " Vierteljahrsschrift fiir 

Volkswirthschaft," Bd. IV, pp. 130-172, 1864, and Bd. I, 

pp. 196-210, and Bd. II, pp. 77-110, 1865. Forming 

also Bd. II of " Volkswirthschaftliche Schriften." Berlin, 

1873. 

A very able treatise upon speculation. 
Rogers, J. E. T., " Industrial and Commercial History of 

England." London, 1892. 

Ch. IV, " The Development of Credit Agencies." 
Schaffle, Albert E. F., article "Die Handelskrisis mit beson- 

derer Riicksicht auf das Bankwesen," in " Deutsche 

Vierteljahrsschrift," Heft I, 1858. 

Misuse of credit the cause of crises ; economic morality the cure. 
" Bau und Leben des sozialen Korpers." Tubingen, 1875. 

Bd. I, p. 452 ff. 
Stein, Lorenz von, " Lehrbuch der Volkswirthschaft," pp. 

225-230. Wien, 1858 ; or pp. 424-448, Ed. Wien, 1878. 
Stevens, Albert Clark, article " The Utility of Speculation," in 

"Political Science Quarterly," Vol. VII, September, 1892. 

Radically defends speculation. 

IX. THE PSYCHOLOGY OF CRISES 

Consult the preceding section. 

Anonymous, article "Great Awakenings," in the "Galaxy," 
Vol. VI, pp. 388-398. New York, 1868. 

239 



BIBLIOGRAPHY 

Discusses the revivals of religion in New York City and else- 
where in 1857, following upon the crisis of that year. 
Adams, Charles Francis, "Massachusetts, its Historians and its 

History ; an Object Lesson." Boston and New York, 1893. 
Bain, Alexander, "The Emotions and the Will." 3d Ed. 

London, 1875. 

Reprint, New York, 1876. 
Bourne, H. R. F., "Romance of Trade." London, 1868. 

Especially Ch. XI for account of early panics and manias. 
Catteneo, " Delia Psicologea della menti Associate," in " Atti 

del Regio Instituto Lombardo," Vol. Ill, 1862. 

Upon the psychology of public opinion. 
Drake, Samuel G., "The Witchcraft Delusion in New Eng- 
land." Roxbury, Mass., 1866. 

Woodward's Historical Series, Nos. 5, 6, and 7. 
Fry, Edward, article " Imitation in Human Progress," in the 

"Contemporary Review," Vol. LV, pp. 658-677, May, 

1889. 
Hecker, J. F. C, "The Epidemics of the Middle Ages." 3d Ed. 

London, 1859. 

Translated by B. G. Babington, M.D., F.R.S. 
Langton, William, " Observations on a Table showing the 

Balance of Account between the Mercantile Public and 

the Bank of England," in Transactions of Manchester 

Statistical Society, 1857-58 ; also republished as appendix 

to "Transactions," 1875-76. 

Suggests moral causes as explaining crises. 
Lorimer, J. G., D.D., "The Great American Revivals." 

Glasgow, 1859. 
Mackay, Charles, LL.D., " Memoirs of Extraordinary Popular 

Delusions and the Madness of Crowds." 2d Ed. 2 Vols. 

London, 1852. 
Mills, John, "Credit Cycles and the Origin of Commercial 

Panics," in Transactions of the Manchester Statistical 

Society, 1867-68. 

Traces the psychology of credit in relation to crises. 
Moll, Albert, "Hypnotism." London, 1890. 

Contemporary Science Series. 

240 



BIBLIOGRAPHY 

Oechelhauser, Wilhelm, " Die wirthschaftliche Krisis." Berlin, 

1876. 
Southey, Robert, " The Life of Wesley ; and the Rise and 

Progress of Methodism." London, 1871. 

Bohn's Standard Library. 
Sully, James, "Illusions : a Psychological Study." Especially 

Ch. XI, "Illusions of Belief." New York, 1881. 

International Scientific Series. 
Tarde, G., "Les Lois de I'lmitation." Paris, 1890. 
Taylor, Isaac, "Natural History of Enthusiasm." 8th Ed. 

London, 1842. 
Upham, Rev. Charles W., " Salem Witchcraft." Boston, 1867. 
"Lectures on Witchcraft, comprising a History of the 

Delusions in Salem in 1692." 2d Ed. Boston, 1832. 
Wendell, Barrett, "Cotton Mather, the Puritan Priest." New 

York, i8qi. 



X. MISCELLANEOUS WORKS UPON CRISES 

</ Allard, " La Crise, La Baisse des Prix, La Monnaie." Brux- 

elles, 1885. 
^ Bagehot, Walter, " Lombard Street ; a Description of the 
Money Market." Being Vol. V, pp. 1-2 16, of Complete 
Works issued in 5 Vols, by The Traveler's Ins. Co., 
Hartford, Conn., 1891. 
V Berliner, Adolf, " Die wirthschaftliche Krisis, ihre Ursachen 
und ihre Entwickelung." Hannover, 1878. 
Bilgram, Hugo, "Involuntary Idleness. An Exposition of 
the Causes of the Discrepancy existing between the 
Supply of and the Demand for Labor and its Products." 
Philadelphia, 1889. See also brief report of a paper 
read before the American Economic Association, Dec. 29, 
1888, in the proceedings of that Association. 

Advocates an expansion of the currency, which, in reducing 
interest shall reduce the profit necessary for marginal producers 
who must borrow, and hence will raise wages. 
^ Block, Maurice, article, " La Crise Economique," in " Revue 
R 241 



BIBLIOGRAPHY 

des Deux Mondes," March 15, 1879, Tome II, pp. 

433-459- 

Troisifeme Periode, Tome XXXII. 

Biisch, Johann Georg, " Geschichtliche Beurtheilung der am 
Ende des achtzehnten Jahrhunderts entstandenen grossen 
Handelsverwirrung/' contained in Bd. VII of " Sammt- 
liche Schriften," 16 Bde. Wien, 18 13-18. 

Busch, Ernst, " Ursprung und Wesen der Wirthschaftlichen -i 
Krisen und Angabe der Mittel zu ihrer Beseitigung." 
Leipzig, 1892. 

Cannan, Edwin, " A History of the Theories of Production 
and Distribution in Enghsh Political Economy from 1776 
to 1848." London, 1894. 

This book, with that ot Held, is indispensable for an un- 
derstanding of the significance of the theories of English 
Economy. 

Callender, W. R., Jr., "The Commercial Crisis of 1857, its / 
Causes and Results ; being the Substance of a Paper read 
before the Manchester Statistical Society, with an Appen- 
dix containing a List of upwards of 260 English Failures 
in 1857-58." 44 pp. London, 1858. 

Carey, Henry Charles, "Financial Crises, their Causes and \j 
Effects." Philadelphia, 1864. 
Sees in fi-ee trade the cause of financial crises. 

Chitti, " Des Crises Financieres et de la R(^forme du Systeme ^ 
Monetaire." Bruxelles, 1839. 

Commissioner of Labor, First Annual Report of, entitled " In- 
dustrial Depressions." Washington, 1886. 

Craik, Dinah Maria, " John Halifax, Gentleman." New York, 
1870. 
Containing a lively description of the crisis of 1825. 

Bort, L. Muret de, "Crise Monetaire. De la Situation Re- v 
spective des Grands Etats Commer9ants, de la Crise, et 
de ses Causes, du Role important de la Monnaie." 
Paris, 1856. 

Diihring, Eugen Karl, " Kritische Grundlegung der Volks- 
wirtschaftslehre." BerHn, 1866. 
Especially pp. 242-268. 

242 



BIBLIOGRAPHY 

" Kursus der National- und Sozialbkonomie." Abschnitt 

IV, Kap. I. Berlin, 1873. 
^ Evans, D. Morier, " The History of the Commercial Crisis, 
1857-58, and the Stock Exchange Panic of 1859." Lon- 
don, 1859. 
^ — — "Commercial Crises 1847-48." London, 1848. 

Faucher, L., "Etudes sur rAngleterre." Paris, 1856. 
Especially Tome I, pp. 360-383. 

Frewen, Moreton, B.A., "The Economic Crisis." London, 
1888. 
Mr. Frewen sees in the demonetization of silver and the appre- 
^ y ciation of gold the cause of crises. 

"*• Geyer, Ph., "Banken und Krisen : eine Studie." Leipzig, 
1865. 

Gibbons, J. S., "The Banks of New York, their Dealers, the 
Clearing House, and the Panic of 1857." New York, 
1858. 

Giffen, Robert, "Essays in Finance." ist Series, 5th Ed. 
London, 1890; 2d Series, 5th Ed. New York, 1886. 
vGoadly, Edward, and W. Watt, "Present Depression in 
Trade ; its Causes and Remedies," with preface by Leon 
Levi. Being the Pears' Prize Essays, read before the 
British Association for the Advancement of Science, 
September, 1885. London, 1885. 

Held, Adolf, "Zwei Biicher zur sozialen Geschichte Englands." 
Leipzig, 1 88 1. 

Important in explaining the connection between English eco- 
nomics and politics. 

article " Handelskrisen," in Loning's edition of Blunt- 

schli's "Staatsworterbuch." Bd. II, pp. 173-180. Leip- 
zig and Stuttgart, 1876. 

Herkner, Heinrich, "Die Oberelsassische Baumwollindustrie 
und ihre Arbeiter auf grund der Thatsachen dargestellt." 
Strassburg, 1887. 
Particularly Kap. XIV. 

" Die sozial Reform als Gebot der wirtschaftlichen 

Fortschrittes." Leipzig, 1891. 
Pages 33-96. 

243 



BIBLIOGRAPHY 

Hermann, F. B. W. von, " Staatswirtschaftliche Unter- 

suchung." 2 Aufl. Miinchen, 1870. 

Page 631 ff. 
Hooper, Wynnard, essay " The Influence of State Borrowing 

on Commercial Crises." Being Ch. V in " A Policy of Free 

Exchange," edited by Thomas Mackay. London, 1894. 
Issaiev, A. A., article *'Les Principales Causes des Crises \j 

Economiques," pp. 654-692 and 985-101 1 in "Revue 

d'Economie Politique," Tome VII, 1893. 
Leroy-Beaulieu, Pierre Paul, "Das sinken der Preise und die 

Welthandels Krisis." BerHn, 1886. 

Uebersetzt durch E. V. Kalckstein. 
McCulloch, J. C, article "Crisis in the American Trade," in v 

"Edinburgh Review," Vol. LXV, July, 1837. 
Macpherson, "Annals of Commerce." 4 Vols. London, 1805. 

Consult especially for account of early crises and manias. 
Meyer, R., "Politische Griinder und die Korruption in 

Deutschland." Leipzig, 1877. 
Michaelis, 0., article "Die Krisis von 1857," in Pickford's 

"Monatsschrift," Bde. 1-3. Erlangen, 1858-59. 
Morisseaux, Charles, "La Crise Economique." Paris, 1884. 
Neumann-Spallart, Franz Xavier von, " Uebersichten der 

Weltwirtschaft." Stuttgart, 1879. 

Especially Jahrgang 1879, upon the crisis of 1873. 
Neuwirth, Joseph, "Die Speculationskrisis von 1873," being 

Bd. II of " Die Bank und Valuta in Oesterreich-Ungarn, 

1862-72." 2 Bde. Leipzig, 1874. 
Patterson, R. H., article "Bad Trade and its Cause," in "Con- y 

temporary Review," Vol. XXXV, April, 1879. 
Playfair, Sir Lyon, article " The Progress of Applied Science V 

in its effect upon Trade," in "Contemporary Review," 

Vol. LIII, March, 1888. 

Discusses over-production and machinery. 
Salomons, David, "A Defence of the Joint Stock Banks : an 

Examination of the Causes of the Present Monetary 

Difficulties, and Hints for the Future Management of the 

Circulation." 2d Ed. London, 1837. 
244 



BIBLIOGRAPHY 

Scudder, M. L., Jr., "Congested Prices." Chicago, 1883. 
Smith, R. H., "The Science of Business." London and New 
York, 1888. 
I Smith, Walter E., " The Recent Depression of Trade ; its 
Nature, its Causes, and the Remedies which have been 
Suggested for it." London, 1880. 
Cobden Club prize essay for 1879. 
Stevens, Albert C, article " Phenomenal Aspects of the Fi- 
nancial Crisis," in "Forum," Vol. XVI, September, 1893. 
Emphasizes the conservative nature of business in the United 
States immediately preceding the crisis of 1893. 
Stopel, F., " Die Handelskrisis in Deutschland," being Heft I 
of his " Volkswirthschaftliche Zeitfragen." Frankfurt 
a/M., 1875. 
Struck, E., article "Zur Geschichte der Pariser Borsenkrisis 
vom Jahre 1882," in "Jahrbuch fiir Gesetzgebung, Ver- 
waltung und Volkswirthschaft im deutschen Reich." 
N. F., Bd. VIL Leipzig, 1883. 
^ Testelin, E. A., " Economic Politique ; ^tude sur la crise in- 
dustrielle, commerciale, et agricole." Bruxelles, 1885. 
Toynbee, Arnold, " Lectures on the Industrial Revolution of 
the Eighteenth Century in England." With Memoir by 
B. Jewett. New York, 1890. 
^ Wallace, A. R., " Bad Times." London and New York, 1885. 
See as the causes of industrial depression for England — foreign 
loans, war expenses, rural depopulation, millionnaires, speculation, 
dishonesty, private property in land, etc. 
h| Wasserrab, Karl, "Preise und Krisen." Stuttgart, 1889. 
Comprising " Die Wirthschaftskrisen und die Entwicke- 
lung der Krisis von 1873," published also separately. 
Stuttgart, 1889. 
\j Willson, H. B., "Industrial Crises: Their Causes and 
Remedy." Washington, 1879. 



245 



NDEX 



Adams, C. F,, effect of concentra- 
tion of interest in religious mat- 
ters, 193, 194. 

Adams, H. C, uncertain indus- 
tries and taxes, 25. 

Agriculture, stability of, 24. 

Bacon, optimistic expectations, 190. 

Bagehot, excessive activity of this 
generation, 199; economization 
of cash, 142; sun-spot and har- 
vest theory, 135. 

Balance of trade, 29. 

Bank, public financiering through a 
state bank, 105 ; reduction of re- 
serves begins a crisis, 105 ; func- 
tions of, 107 ; relative importance 
of banks for crises, 108 ; charters, 
108 ; examination, 109 ; state- 
ments, 108; duties of directors, 
109, no; of France, in, 114; 
note issue, 111-116; of England, 
114; overemphasized, 116; and 
the standard of punctuality, 161 ; 
credit and crises, 162 ; stingy, 
170 ; and stock exchange, 170. 

Bankruptcy, two conceptions con- 
trolhng legislation, 126, 127 ; dis- 
honest, 127, 128 ; voluntary and 
involuntary, 128 ; hindrance to 
discharge, 128, 129, 

Belief effected by action, 198, 

Bellamy, 49, 50. 

Boccardo, sun-spot theory of perio- 
dicity, 135. 

Brentano, voluntary insurance, 98- 

lOI. 



BuUion Committee, 116. 

Capital, r61e of, since the " Indus- 
trial Revolution," 58; "use of 
capital " in broad sense, 65, 66; 
makes the productive process 
roundabout, 69 ; proper distribu- 
tion of, in investment difficult, 
70, 71 ; can be used to solve its 
own problem, 79. 

Captains of industry, and uncer- 
tain economic conditions, 49; 
and crises, 222. 

Carey, theory of bank-note issue, 

115. 

Causes of crises, 13, 14 ; list of, by 
Max Wirth, 23 ; settlement of 
balance of trade, 29 ; accidental, 
Ch. II ; Roscher on, 35 ; Von 
Stein and credit, 157. 

Chalmers, on saving, 78. 

Chance, in relation to speculation 
and gambling, 166. 

Chevalier, government interfer- 
ence with a state bank, 114. 

Clearing-house, certificates, 106; 
control of banks, no. 

Combination, to regulate supply 
and demand, 52. 

Commerce, new routes of, 26. 

Competition, over-production, 49; 
intensified by an element of pug- 
nacity, 72; of banks in note 
issue, III, 112; of banks of 
issue a mutual check, 115. 

Conceit, fatal in speculation, 170, 
171. 



247 



INDEX 



Concentration, of wealth and un- 
stable demand, 32; of industry, 
42 : and effect of crises on em- 
ployers, 42; effect on business 
judgments, 204, 205. 

Condorcet, plan of insurance, loi. 

Consolidation, following crises, 51. 

Consumption, the study of, neg- 
lected, 74; Engel's laws, 38, 39. 

Control, lack of organs of eco- 
nomic, 41 ; application of capi- 
tal to the problem of, 47 ; private 
property, 48 ; through stock ex- 
changes, 53; through commer- 
cial agencies, 54. 

Corporations, charters, 121; safe- 
guards in founding, 121 ; control 
by stockholders, 122; demo- 
cratic principle, 122; voting 
power of shares, 122, 123; issue 
of stock without full payment of 
capital, 123 ; limit of borrowing 
power, 123, 124; pubhc record 
of share ownership, 124. 

Credit, emphasized by Wagner, 6 ; 
and crises, 24; growth of, and 
crises, 153 ; separates demand 
and supply, 154; Lorenz von 
Stein, 155 ; uses of, 155, 156 ; 
Adam Smith on, 156; dangers 
of, 157 ; Rodbertus ignores, 157 ; 
and unwise consumption, 158; 
for short periods only, 160; 
ethics of use of money of others, 
161, 162; and trustworthiness, 
165, 178. 

Crisis, definition, 3 ; descriptions 
of, 2, 3 ; classification, 5 ; Wirth's 
classification, 6 ; importance of 
study, 7; nineteenth century 
phenomenon, 8, 23; territorial 
distribution, 9 ; Teutonic nations, 
9 ; democracies, 9 ; table of, 10 ; 
whether increasing, 1 1 ; place of 
subject in Political Economy, 
11-13; of 1893 and monetary 
legislation, 30; coincident with 



modern wage-earners' problem, 
81 ; list of, 137; Jevons' list, 144; 
and revivals of religion, 209, 210 ; 
loss, 220, 221 ; and captains of 
' industry, 222. 
Currency School, 116, 117. 

Demand, instabihty of, 31, 32; di- 
vergence of law of production 
and consumption, 31 ; uncer- 
tainty of, 44. 

Depression, contrasted with crisis, 

4.5. 

De Tocqueville, crises and democ- 
racies, 9. 

Diminishing returns, law of, 59. 

Directors of banks, duties of, 109, 
no. 

Distribution of wealth, unequal, 
furthers over-investment, 73 ; 
crises and inequalities in, 222. 

Division of labor and coordination 
of demand and supply, 43. 

Education, 212-215. 

Ely, R. T., treatment of crises, 12. 

Emotions, transfer of, 208, 209 ; in- 
fluence of, on judgment, 185 If. ; 
influence on recollection, 186- 
188 ; influence on expectation, 
188 ; the haste to be rich, 206, 
207. 

Employment given by state during 
a crisis, 36. 

Epidemics, religious, 193, 194. 

Equilibrium of demand and sup- 
ply, 21 ; static conception, 21 ; 
dynamic conception, 21 ; equi- 
librium theory, 35. 

Expectations, Shakespeare, 190 ; 
Bacon, 190; Ward, 190; Young, 
190. 

Fashion, 31 ; and machinery-made 

goods, 43. 
Foreign trade, unstable, 24, 27 ; 

and crises in England in 1857. 



248 



INDEX 



31 ; and crisis cycles, 45 ; Schmol- 
ler considers, a cause of crises, 
46 ; temporary relief from over- 
production, 76. 

Future, underestimation of, 159, 
160. 

" Futures," dealings in, 171. 

Gambling, 165, 166; psychology of, 

196, 197. 
Guyot, psychology of crises, 181. 

Hadley, on sun-spot theory, 151. 
Herschel, sun-spots and climate, 

148. 
Hertzka, theory, 89. 
Hobson, effect of machinery, 42. 
Honesty and credit, 161. 

Individual business units, 50. 

Individualistic production, 49. 

Industrial revolution, changes 
caused by, 42. 

Insurance, extension of, 55; 
Wachtel's proposal, 55; to raise 
the standard of life, 98-101; 
Condorcet, loi. 

Insolvency, see Bankruptcy. 

Interest, decline of rate of, 58 ; ex- 
planation of, by Adam Smith, 58; 
Ricardo on, 59-60 ; J. S. Mill on, 
61 ; decline of, and speculation, 
62; and crises, testimony of his- 
tory, 64; meaning of average rate 
of, 161. 

Inventions of Watt, Crompton, 
and Arkwright, and crises, 83; 
general discussion, 25; increas- 
ing disturbance caused by, 26. 

Jevons, list of causes of crises, 14; 
theory of periodicity, 139-151. 

Joint stock companies, see Cor- 
porations. 

Juglar, definition of crisis, 4; re- 
duction of bank reserves, 105. 

Juristic person, 120. 



King, Gregory, tables, 141. 

Labor organizations and the stand- 
ard of life, 97. 

Laveleye, settlement of balance of 
trade causes crises, 29. 

Law of markets, 17. 

Legal tender notes, retirement of, 
107. 

Legislation, urged after every crisis, 
103; crises with diverse, 104; 
monetary, 104-107 ; difficulty of 
enacting proper, 129 ; enactment 
of new, 163. 

Literature, of little value, 15; 
French, 17; English, 17; Ger- 
man, 18; fairly inclusive, 220. 

Luxurious expenditure, and over- 
production, 75; Chalmers, Sis- 
mondi, and Owen approved, 90. 

Machine-made goods sold to wage 
earners, 85, 86. 

Machinery, demands uniformity, 
31, 51; effect of, 42; and over- 
production, 76. 

Managerial ability, 50 ; and rate of 
interest, 65; and use of capital, 
66 ; lack of, shown by gluts, 69 ; 
modern need of, 70, 77 ; remu- 
neration of, 78 ; Smart, 78 ; and 
salaries, 79. 

Market, expansion of, 43, 44. 

Memory, the selective, 187, 188. 

Mercantile agencies, 165. 

Middlemen, elimination of, 53. 

Mill, J. S., crises, where treated in 
his work, 13; theory of tendency 
of profits to a minimum, 61 ; 
emphasizes credit, 156. 

Mills, education as a remedy, 214; 
psychology of crises, 180, 181. 

Mississippi Scheme, 196. 

Money, study of, in connection 
with financial history, 105; 
American system produces strin- 
gency during a crisis, 106 ; ideal 

249 



INDEX 



system, io6 ; " Currency School " 
theory of depreciated paper, 117. 
Monopolies, 29, 51 ; cornering the 
market, 29; growth and modi- 
fication of, 52; close establish- 
ments, 72. 

Neuwirth, desire for wealth, 206. 

Oechelhauser, the panic, 208. 
Organization, ability for, see 

Managerial Ability. 
Over-capitalization, 46. 
Over-investment, theory of Rod- 

bertus, 85-89. 
Over-production, 67, 68. 
Overstone, power of the Bank of 

England, 113. 

Paper currency, unstable equilib- 
rium of trade, 24; temporary 
issue of, to ease a stringency, 36. 

Peel, theory of note issue, 117, 118 ; 
Bank Act of 1844, 17; act must 
be suspended during a crisis, 
106; effect of act, 118, 119; when 
act was violated, 119. 

Periodicity, school of writers de- 
nying, 22; of decline of profits, 
64 ; Diihring, 35 ; climatic periods, 
147; of harvests not shown for 
recent years, 149; of maximum 
sun-spots, 143; effect of sun- 
spots on harvests, 143 ; growth of 
credit, 138 ; succession of genera- 
tions, 139; general law of, 132; 
of economic affairs due to sea- 
sons, 133 ; of reforms, 133; move- 
ment of settlement, 133. 

Petty, first mention of periodicity, 

135. 

Plunkett, T. F., description of 
crises, 3. 

Precious metals, course of, 29 ; pro- 
duction of gold in California, 30. 

Private property, Rodbertus would 
retain, 91; an evolution to ex- 



tinguish ownership in capital, 91 ; 

and the control of industry, 48 ; 

relation of ownership to control, 

52. 
Production, law of, divergent from 

that of consumption, 31. 
Profit, falling, and production on a 

large scale, 88. 
Public opinion, concentrated on a 

single bank of issue, iii; and 

honor debts, 176. 
Punctuality, 160. 
Psychology, of crises, 180 ; of crisis 

theories, 182, 183; individual 

psychology, 185-197; social 

psychology, 198-207 ; psychology 

of the crisis proper, 207-211; 

Oechelhauser, 208. 

Quarter-day, influence on trade, 
140, 141. 

Reform, periodicity of, 133. 

Remedies, paper currency, 36; 
failure of paper currency in the 
United States in 1873, 36; edu- 
cation, 212, 215 ; widening range 
of social interests, 215, 216, 

Revivals of religion and crises, 209, 
210. 

Rodbertus, his theory of distribu- 
tion, 82, 84; ideal plan for state 
control of industry, 92 ; criticism, 
95, 96; Cohn's criticism, 94; 
ignores speculation, 157. 

Roscher, definition of crisis, 4; 
stable equihbrium, 22; his con- 
tribution, 34 ; causes, 35 ; denies 
periodicity, 136. 

Salaries, and organizing ability, 79. 
Saving, 73, 74; private maxim 

and economic principle, 'jt, 78 ; 

Chalmers on, 78. 
Schaffle, growth of credit, 157, 158. 
Scudder, Jr., denies periodicity, 

136. 



250 



INDEX 



Self-interest, principle of, hinders 
•organization, 49. 

Smart, managerial ability, 78. 

Smith, Adam, explanation of de- 
cline of profits, 58 ; money econ- 
omized by using credit, 156; 
speculative returns in wages, 165. 

Socialism, and German literature 
of crisis, 18 ; mistake of (Smart) , 
78. 

Solidarity, of industry, 7; evinced 
by world crisis, 10 ; increased by 
credit, 24, 153 ; and credit, 34 ; 
of economic problems, 223. 

Speculation, 165-178 ; and decline 
of profits, 62; Rodbertus con- 
siders unimportant, 87 ; Adam 
Smith, 165 ; function of, 167, 
169 ; lessens chance, 168 ; " fu- 
tures," 171 ; margins, 171 ; in 
government securities, 174; tax- 
ation of, 174, 175. 

Standard of life, and socialism, 96; 
reforms through its elevation, 97 ; 
and labor organizations, 97 ; and 
insurance, 98-101. 

Statistics, 37 ; Engel's laws of con- 
sumption, 38-39; educate the 
public to, 54. 

Stein, Lorenz von, effect of credit, 

155. 
Stock exchange, exercising control, 
53; control of speculation, 172, 

173- 

Strikes, against unsanitary condi- 
tions, 159. 

Sully, transfer of feeling, 211. 

Sumner, overemphasis of banks in 
connection with crises, 116. 

Sun-spots, see Periodicity, and Jev- 
ons ; years of maximum of, 150. 

Sympathy, 203-205. 

Tariffs, 28. 

Taussig, periodic movement of set- 
tlement, 133. 
Testimony, belief in, 199-203. 



Theories, of crises, two classes of, 

22. 
Tropics, development of, 27. 

United States, dominance of eco- 
nomic interests in, 215. 
Universal glut, 67. 

Value, Rodbertus' labor theory of, 

82. 
Von Thiinen, wage formula, 94. 

Wages, a decreasing factor in dis- 
tribution a cause of crises, 83-89 ; 
"iron law" of, 84; Rodbertus' 
labor-time checks, 92; the Von 
Thiinen formula, 94. 

Wagner, definition of crises, 4; 
overemphasis of a single cause, 
16; restriction of specie pay- 
ments, 114; emphasizes credit, 
156. 

Walker, F. A., treatment of crises, 
13 ; functions of a bank, 107. 

Wants, development of new, 79. 

War, influence on industry, 32, 33 ; 
and crisis of 1815 in England, 
33- 

Ward, optimism of expectation, 
190, 191. 

Wasserrab, place of crises in po- 
litical economy, 12. 

Waste, misinvestment of capital 
relieves plethora of the capital 
market, 89 ; of capital in attempts 
to avoid decline of profits, 62. 

White, definition of crises, 4 ; Teu- 
tonic nations subject to crises, 9 ; 
psychology of crises, 181, 

Widney, ideal monetary system, 
106. 

Wirth, symptoms of a crisis, 2 ; list 
of causes of crises, 23. 

Witchcraft craze in Salem, 193, 194. 

World crisis, 10. 

Young, optimistic expectation, 190. 
51 



